Tax & Business Insights

Handling Non-Filer Cases - Part II: Case Progression

Volume 14 Issue 2 --  March/April 2002

In Part I of this series, we discussed the first meeting with a Non-filer Client and the early stages of typical cases. Now that you have the retainer and a power of attorney (POA) from the Non-Filer, what do you do next?

File the POA ASAP

The next step after the initial meeting is to file the POA ASAP. Why? The filing of the POA creates a record with the IRS that the taxpayer is getting into compliance by retaining an attorney. We have not had a client referred for criminal prosecution after an attorney had been retained, nor have we heard of such a criminal case. Anecdotal evidence indicates that an attempt at getting into compliance usually prevents an indictment.

Contrary to popular belief, immediately filing the POA does not cause an IRS return-preparation compliance clock to begin ticking. In most cases, return preparation takes months and, sometimes, over a year. It is rare for the IRS to ask for returns after a POA is filed unless a local IRS Revenue Officer (R/O) has already been after the taxpayer to collect delinquent returns. Even then, R/Os understand it takes time to assemble old data to prepare late returns.

IRS Sources to Obtain Basic Facts

Another reason for filing an IRS POA is to get basic information from the IRS. Once a POA is filed, IRS transcripts and Master File information can be requested. IRS transcripts provide a history of each year's activity. How can there be activity if the individual never filed? There may be withholding credits and estimated tax payments. Surprisingly, some Non-Filers have made estimated payments and forgotten about them.

How can a Non-Filer have an active collection case if returns have not been filed? Tax assessments may arise because the IRS used a Substitute For Return (SFR). That is, the IRS may have assisted another customer by graciously filing the taxpayer's return. SFR tax assessments (using only W2 and 1099 information) always overstate the tax because only one standard deduction is allowed even if the Non-Filer is married, has children and other potential deductions.

IRS transcripts also provide basic information, such as has the Non-Filer filed a return for an earlier year? Surprisingly, some Non-Filers are not sure if they filed for some years and, of course, they do not keep copies of what was filed.

Another good source of basic facts (especially for business) is the IRS Master File which reflects 1099 income and the name and address of the source. The Master File may provide the only record of gross receipts for some Non-Filers. Master File records should not be blindly followed, however, because some 1099 issuers inflate or fabricate 1099 expenses in order to obtain deductions, especially if they know the recipient is probably not reporting the income.

Attorney-Client Privilege

Attorney-client privilege is the right of a client to protect communications with an attorney. If there is the possibility of tax criminal prosecution, the right not to provide self-incriminating evidence should be protected.

While there is an accountant-client privilege, it generally does not apply to criminal matters.
Attorney involvement to protect the attorney-client privilege does not, per se, mean the return preparer-practitioner loses the ability to prepare the returns. Many tax attorneys do not prepare returns and instead retain accountants to prepare the returns for Non-Filers.

Civil Fraud Penalty

The next step should be to discuss possible civil penalties, beginning with the 75% civil fraud penalty. This, worst-of-all civil penalties, is almost always imposed if criminal sanctions are pursued by IRS Special Agents. In addition to possible criminal penalties and jail time, if the civil fraud penalty is successfully pursued, the taxpayer will owe the delinquent tax plus basic interest, plus the 75% penalty, plus interest on the civil fraud penalty. The effect of the criminal and civil fraud double whammy, plus related interest, is devastating.

Next time, in Part III, we will conclude this Non-Filer series by focusing on other penalties, the preparation and filing of late returns and how to "wrap it up." For a more detailed article on this same subject, CLICK HERE.

Copyright 2002
By Tax and Business Professionals, Inc.
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Manassas, VA 20110
(800) 553-6613

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