• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

Estimated Income???

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

Orebell

Member
What is the name of your state? California

OK, back to helping my friend again. The State of California says my friend owes a sizeable amount of money. My friend did not file his tax returns. So I called the state to find out if they could tell me why my friend owes taxes for this particular year.

So I get the info from the state and it says that my friend had "Estimated Income" of about $34000. Since my friend did not file his return and did not deal with the state, they taxed him, penalized him, and charged him interest. I believe the total owed is about $8000.

The form which shows the "Estimated Income" on it says that my friend had a license with the Bureau of Automotive Repair. My friend cannot put air in a tire and did not own a business related to automotive repair. However, my friend did buy used vehicles at auctions. I think what happened is when he would go to these auctions, I am assuming that not anyone off the street can go to, that maybe he registered as a business with the intent to buy and later sell these vehicles. However my friend never actually followed through on that and believe it or not, he lost most of the vehicles he bought. When I say lost, I mean they were either junked or towed away. He never ever sold a vehicle for a profit.

The state of California says he had a license which was reported to them. Since he did not file a tax return, we tax the industry average of those who do have such a license and tax you. If you do not file a tax return. and do not respond, we assume this is what you owe and then penalize you and charge you interest.

Personally I have never heard of such a thing. That is like saying that since one is a doctor since you did not file a tax return, we will take the industry average that a doctor makes and tax you on it.

You know I can see the state or IRS coming after a person if actual income was reported and a tax return was not file, but taxing one for estimated income seems a bit crazy to me.

Anyway, I plan on talking to a tax professional for my friend. My personal advice is to fill out the state return with zero income since that is what happened. If the state accepts that, then great but if not I imagine they would have to perform an audit or request some additional proof. The thing is, how does one prove $0.

Anyone got any thoughts on this?
 


Kansas4me

Member
Good luck you are going to need it. This is going to be a fun case (NOT) Your friend basically screwed himself by not filing and I doubt seriously if you are going to be able to convince the IRS that he made $0. The thing with the IRS is that they don't have to prove anything, YOU DO. So as you said try and prove you made $0.

He opened himself up when he acted like he was a business so he could go to the auctions. Do you know how many people buy and sell cars without paying a dime in sales tax? Because of that, you are going to be hard pressed to convince anyone that your friend didn't sale these cars, but "lost" them in various ways.
 

Orebell

Member
Evidence

I am not trying to argue with you, my beef is actually with the state. First off, all my friend did was at some point in time get a license to buy cars at auctions. Whether he bought 1 or 100 cars it really does not matter. What matters is what he sold the cars for and whether he made a profit or a loss. The state does not really know how much he actually made. That is why they took the industry average for people with his license and tagged him with the industry average. In other words, they do not know how much he actually made. It is up to him to prove how much he made or lost.

I know I can prove that at least a dozen of the cars he bought were either towed away or junked completely. Yeah, that does not make sense but my friend did a lot of things that did not make sense.

I think by filing the tax return and claiming he made $0 will get him off the hook. Think about it for a second. If we were sitting in front of a judge and told the judge that my friend did buy cars at auctions with the intent to sell them but then never actually sold them but lost them due to neglect, the judge is going to look at that and say that sounds like a loss to me. Then he is going to look over at the State and ask what evidence they have and they will say we have no evidence of him selling car, we just are picking a number based on industry average and taxing him accordningly. I think the judge would throw the state out on their you know what.

You say it will be difficult to prove $0. If there is no documents of any sales, which there are not, then we do not have to prove anything. We can show that if anything my friend has a loss and a big loss. The problem is having a loss does not help him out unless he has income to offset it which he does not.

His big mistake was not filing a return. Personally I don't think he should have been allowed to handle his own financial affairs in the first place, but that is a right we all have and hard to prove otherwise.

I will give you a real life example. This same friend again did not file his tax returns. As far as I know, at least for the last 20 years. Who knows if it is longer. Anyway, I spoke to the IRS and asked them what issues/years does he need to file/address. They told me that 2002 and 2003 needed to be filed because if not, they would tax him based on his stock transactions. So I went back and calculated all his gains and losses and filed his return and not a word was said. I could have, theoretically, faked all the numbers either for my friend or against my friend and again they said nothing. They accepted his return, as is, 2 and 3 years later.

Getting back to the whole buying cars thing. It is entirely possible that one could register as a business to buy these cars, go to auctions, and never ever buy or sell one car. For all I know, my friend did just that. However, because he had that license and because he did not file a return, the state of CA took it upon themselves to "estimate" his income based on an industry average. Had he filed $0 back in 1988, I am sure the result would have been he would have owed nothing. Now 17 years later, if we file the return, I don't think anything will have changed.

Anyway, I will keep the board posted as to the net actual result.
 

Kansas4me

Member
The problem is you are forgetting (or maybe just don't realize) just how many people buy and sell cars "under the table" every year. The fact that your friend filed for a license to do this and bought cars with that license means he was in business. Now even if he finds a way to show he made nothing, he should have been filing tax returns all along. Even with 0 taxliablity the fees and penalities for failure to file can add up.

I had a friend who never filed state taxes. They filed federal but figured they were only going to get under $50 back from state so why mess with it. Guess what that refund turned into over $5000 in fees and penalities over the course of 7 years.
 

Orebell

Member
Thanks for your input. My friends situation gets more interesting each week. I have been obtaining medical records on him because something just is not right. Why would any sane person not file their tax returns. It turns out my friend in 1983 applied for disability income and was granted it. What was his disability? Mental illness. So far I have the last 5 years of his medical records and I am reading page after page where he was seen by a counselor for mental illness.

You say that he should have filed his tax returns. Well no kidding he should have. But do we or should we hold people with mental illness to the same standard? Personally I do not think so.

From what I have read so far, he should not have been handling his financial affairs. That is my opinion. I am hoping his mental illness will get him some slack.

So far I have filed 7 years of federal returns and 3 years of state returns. We will see how it all turns out. I figure between the state and the federal returns there is $70,000 on the table. The question is, how much of that $70,000 can I get wiped out or back for my friend. I am quite certain 2005 will be an interesting year.

I think you may have missed the point of this thread when it started out. My big concern was how the state could "estimate" ones income based on the fact that he bought a license. That should alarm us all as citizens of this USA.

The odd thing is I believe the state is in error. I am 98% my friend did not ever purchase such a license. I did not know him back then, but his brother tells me he knows of no such license. I tried asking the state how is it that if you estimate ones income based on a license, how can that same person show withholding taxes and you show no company reported any of his earnings being withheld. They did not have an answer, they just told me that if I wanted the numbers changed that they have on file, a tax return needs to be filed.

I have a good feeling about all of this. I think all or most of it will be resolved.

If you are interested, let me know and I will keep you posted on this board. I found this board and hoped it might be a good resource. So far what I have seen is many of the questions go unanswered. Or we have people giving advice who really have no business giving advice.

I have looked at a lot of the questions here and thought maybe I could give my two cents. However, people are looking for solid legal advice, not someones opinion.

I think it might be better if people shared their real life experiences here from real situations. That would be more beneficial I think.
 

Snipes5

Senior Member
The reason you feel you are not getting advice is because perhaps we are not telling you what you want to hear. Your posts are difficult to read, and your questions are more of a "how can they do that?" nature than asking how to get the problem resolved.

It is too bad that your friend is mentally ill and got himself in a financial mess. However, the way out of it is not through speculation and trying to understand why the IRS and state have no common sense.

The way out of it is actually pretty cut and dried. Find records of his income. Find out what the IRS actually has on file for those years. Have tax returns done, and file them.

Once you have done that, you will have a better idea of the actual amount he may owe, and you can approach them with an offer in compromise. You should also include with each return a statement indicating why it is so late. Have this done by a professional.

As for states and the IRS "imputing" income, they do it all the time. They have all kinds of statistics they use, and they routinely will send out figures that they have done "for you". If they get no response, that is your debt, period. It isn't illegal, because if it were, someone would have stopped them from doing it.

Stop wondering WHY this is happening, and just take care of it.

I HIGHLY recommend that you hire an Enrolled Agent or other tax professional. You don't appear to know enough about taxation or how the system works to handle this on your own.

Further, although I am an Enrolled Agent myself, even I would not attempt to take on the State of California without professional assistance. At this late date especially, that is just begging for trouble.

Snipes
 

Orebell

Member
The reason you feel you are not getting advice is because perhaps we are not telling you what you want to hear. Your posts are difficult to read, and your questions are more of a "how can they do that?" nature than asking how to get the problem resolved.
Hey, wait a minute, what is so difficult about my posts? It is not like I can really explain the whole situation here. I would have to write a book and who would want to read that. If you do not understand something, ask and try to be a help.

It is too bad that your friend is mentally ill and got himself in a financial mess. However, the way out of it is not through speculation and trying to understand why the IRS and state have no common sense.
There is nothing wrong with speculation. It may not be the most effective use of time, but it certainly does not hurt anything.

The way out of it is actually pretty cut and dried. Find records of his income. Find out what the IRS actually has on file for those years. Have tax returns done, and file them.
Perhaps I did not convey that is exactly what I have done. However, if you go back and read my message, you will see that the state estimated his income based on a license he supposedly held. He never held such a license and therefore there was no income. How do you gather something that does not exist? And maybe I did not convey, but the IRS does not have any return information on file either for those years.

Once you have done that, you will have a better idea of the actual amount he may owe, and you can approach them with an offer in compromise. You should also include with each return a statement indicating why it is so late. Have this done by a professional.
Make an offer in compromise on zero income? Why would there need to be any offer in compromise? That does not make any sense. And if you know anything about an offer in compromise, if one has the funds to pay, it is pretty unlikely they will take any offer. My friend has the money to pay, but why should he pay on something he does not owe.

In regards to hiring a professional, I am going to have to differ on that one. Don't get me wrong, a professional certainly has their place in certain situations, but not every situation needs a professional. I have actually had a few brief consultations with a professional but it has been merely to get advice on which direction to go. I am not going to hire a professional to do all the grunt work that I can do for free as a friend.

As for states and the IRS "imputing" income, they do it all the time. They have all kinds of statistics they use, and they routinely will send out figures that they have done "for you". If they get no response, that is your debt, period. It isn't illegal, because if it were, someone would have stopped them from doing it.
It may not be illegal but that does not mean it is right. I think it is a violation of us as American citizens. I would fight against it if I could.

You don't appear to know enough about taxation or how the system works to handle this on your own.
I think I have a pretty good idea how the system works.

Further, although I am an Enrolled Agent myself, even I would not attempt to take on the State of California without professional assistance. At this late date especially, that is just begging for trouble.
It sounds to me like you have your own fears. Personally I am not afraid of the state of CA or the IRS. I think they want people to be afraid so they will not challenge them. I am not falling for that trap.

Have a great day.
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top