A Question for Taxing Matters

[paddywakk]

Arizona

My sister has been self-employed for several years and failed to file tax returns since 2017, even though she netted enough income each year to be required to file.

Now she would like to file for 2020, but is afraid the IRS is just waiting for her to file so they can track her down and apply whatever penalties she has waiting for her due to her failure to file in the past.

I feel she should go ahead and file, pay at least the taxes owed for 2020, and work with the IRS on the past due amounts, whatever they may be. I don't believe they know she's been working but just can't find her without her current address. And I don't believe she will draw unwanted attention to herself if she files for the first time in a few years.

What do you think?

 

[Zigner]

I think she should speak to a tax pro about how to resolve this mess. Honestly, if she pays what she owes (including penalties and interest), I doubt it would go any further.

 

[Taxing Matters]

What do you think?

She should file her 2020 return on time to avoid the penalty for late filing and pay it in full, if possible. She should also make sure she is paying her 2021 estimated taxes. Then she should promptly file the earlier returns, too. For late returns with a balance due she'll get penalized for late filing, for late payment, and have to pay interest on the tax owed, and likely will have a penalty for failure to make estimated taxes (which is just an interest charge), too. By far the biggest of the penalties is the late filing penalty which is why the best advice in most cases is for taxpayers to file their federal income tax returns on time even if they can't pay the tax. Once all the returns are filed if she needs time to pay the IRS makes it pretty easy for most individual taxpayers with balances due of less than $50,000 to set up installment agreements and getting an installment agreement in place before getting the notice of intent to levy (CP504), which the IRS calls the final notice, cuts the future late payment penalty that accrues each month in half; waiting until the CP504 is issued will result in future accruals of the late payment penalty to be double the base amount. So the sooner she files and pays or makes arrangements to pay the less this will cost her.

Note a couple of additional things here related to filing. First, there is no statute of limitation for the IRS to assess tax when the return has not been filed. Thus one of the advantages to filing is that it starts the 3 year period for the IRS to audit the return and assess tax. That provides some certainty for taxpayers that after the 3 years (absent fraud or a few other circumstances) they'll not have to worry about the IRS hitting them up for more tax. Without the return being filed, the IRS could legally come after her even decades later to assess tax for those years (though in most cases it does not go back that far, but still is it possible). Second, while criminal charges for failure to file or tax evasion are pretty unlikely in the usual self employment failure to file case, filing an accurate return before you get notice of an IRS criminal investigation will kill any possible criminal charges. Third, should she need to file bankruptcy in the future the taxes owed may be eligible for discharge but only if she filed the returns at least 3 years prior to filing the bankruptcy petition. And finally, being self employed she gets credits towards her Social Security old age and disability benefits from the self employment earnings she has. She only gets credit for that if she files her returns. So not filing the returns can mean a smaller Social Security benefit or even make the difference between being eligible for them at all, depending on her circumstances.

So there are a lot of reasons why filing returns promptly is a good idea. So I suggest she meet with a tax pro ASAP and start the process of getting these returns completed and filed, and start making estimated payments so she doesn't fall behind for 2021 or incur any penalties for 2021 and after.

 

[paddywakk]

She met with a tax pro who estimated she owes $50K+. Does that amount mean she won't be able to arrange a payment plan?

Once COVID hit and the lockdowns began, business dropped off to nearly zero. She's currently staying with me as she can no longer afford to rent an apt.

Her biggest concern is that they are waiting for her to file so they can pounce on her. Do you think that's likely?

 

[adjusterjack]

The IRS isn't her only problem. There's Arizona income taxes and whatever sales taxes she should have been paying to the cities in which she did business, if sales tax was required.

 

[LdiJ]

Arizona

My sister has been self-employed for several years and failed to file tax returns since 2017, even though she netted enough income each year to be required to file.

Now she would like to file for 2020, but is afraid the IRS is just waiting for her to file so they can track her down and apply whatever penalties she has waiting for her due to her failure to file in the past.

I feel she should go ahead and file, pay at least the taxes owed for 2020, and work with the IRS on the past due amounts, whatever they may be. I don't believe they know she's been working but just can't find her without her current address. And I don't believe she will draw unwanted attention to herself if she files for the first time in a few years.

What do you think?

If she has received any 1099s from her customers then yes, the IRS is going to know that she has not filed. I normally recommend that people prepare all of the tax returns they need to file all at once, so that they know the extent of their problem. Normally I also encourage them to file the returns all at once so that they can get on a payment plan for everything.

 

[LdiJ]

She met with a tax pro who estimated she owes $50K+. Does that amount mean she won't be able to arrange a payment plan?

Once COVID hit and the lockdowns began, business dropped off to nearly zero. She's currently staying with me as she can no longer afford to rent an apt.

Her biggest concern is that they are waiting for her to file so they can pounce on her. Do you think that's likely?

Did the tax pro prepare returns to come up with that estimate?

 

[Taxing Matters]

She met with a tax pro who estimated she owes $50K+. Does that amount mean she won't be able to arrange a payment plan?

No. What it means is that it will take some more effort to get it. She'll need to submit a full set of financial statements on IRS forms and her installment agreement will be based on an analysis of that information to determine her ability to pay.

Once COVID hit and the lockdowns began, business dropped off to nearly zero. She's currently staying with me as she can no longer afford to rent an apt.

Then it is even possible that the IRS will determine she has no present ability to pay and close the case currently not collectible (CNC), which means that the IRS won't pursue active collection now but will revisit that in the future should her income go up. Note that interest and the late payment penalty continue to accrue while the case is in CNC status (though there is a cap on how large the late filing penalty can get).

Her biggest concern is that they are waiting for her to file so they can pounce on her. Do you think that's likely?

No. If the IRS thought there was significant tax owed for those prior years it would have started the process to pursue that already; starting with letters asking her to file the returns and then either preparing a return for her based on info the IRS already has or sending the case out for a revenue officer or tax examiner/revenue agent to work. The IRS may not have the information to know that she was self-employed and that significant tax is owed. At least not yet. It may be that it gets that info later on, and that could cost her if she waits and banks on the IRS never catching up to her.

I normally recommend that people prepare all of the tax returns they need to file all at once, so that they know the extent of their problem. Normally I also encourage them to file the returns all at once so that they can get on a payment plan for everything.

Generally my approach, too, with the exception that I would not hold up preparing and filing the 2020 return to wait for the earlier returns to be done if that means the 2020 return gets filed late and incurs that expensive late filing penalty. If because of the covid-19 drop in business she actually has no tax due for 2020 then it is not quite as urgent to get it filed by the due date, though still a good idea to do.

 

[paddywakk]

Did the tax pro prepare returns to come up with that estimate?

No, it was based solely on gross income.

 

[paddywakk]

Thanks to everyone who replied. I'll pass along this info and hope she gets it together!

 

[davew9128]

No. What it means is that it will take some more effort to get it. She'll need to submit a full set of financial statements on IRS forms and her installment agreement will be based on an analysis of that information to determine her ability to pay.

This policy changed some time ago. The streamlined installment agreement limit (meaning no financials) is currently at $100k, and my sources in the Service tell me that in order to clear out case inventory, that ACS is now raising it to $1mil.

 

[LdiJ]

This policy changed some time ago. The streamlined installment agreement limit (meaning no financials) is currently at $100k, and my sources in the Service tell me that in order to clear out case inventory, that ACS is now raising it to $1mil.

That is good to know. The last I remember it went from 25k to 50k. Knowing that it has gone to 100k is very helpful to know.

 

[Taxing Matters]

This policy changed some time ago. The streamlined installment agreement limit (meaning no financials) is currently at $100k, and my sources in the Service tell me that in order to clear out case inventory, that ACS is now raising it to $1mil.

It is my understanding that the $100,000 streamlined IAs was a pilot program that has not been made permanent. I see nothing on the IRS web site that now refers to this program. The IRM still refers to the $50,000 limit for streamlined IAs and the IRS web site online installment agreements still refers to $50,000 for installment agreements and $100,000 for short term extensions (up to 120 days). And the IRS page on streamlined IAs also still refers to $50,000 as the limit, and that page was reviewed (as stated at the bottom of the page) just last June. So I provided the information on this thread that I could verify with links to the IRS web site as I do not know the current state of the pilot program nor is there any confirmation that the program is now permanent. If you have a link from the IRS that states the program is permanent or still in effect and what the current criteria is for it, I'd appreciate it if you would share it.

 

[davew9128]

I don't know that I can link to anything official or authoritative, only 2nd hand discussions with reputable people who do a lot more resolution work than I do.