Non-filers & Delinquent Tax Returns
With the increase in numerous controversy issues being developed by the IRS, more and more taxpayers are coming forward to take care of their obligations for past years’ taxes not yet filed.
One of the big surprises that non-filer traders get is when their tax preparer files their tax return, looking for a refund of estimated taxes paid (Form 1040-ES) or taxes paid with the filing of an old extension request (Form 4868), is that several months later the IRS writes to tell them that their tax overpayment is being forfeited as a penalty for being a non-filer.
IRS calls this non-filer penalty their RSED plan for the normal “Refund Statute Expiration Date” (see IRS Restructuring and Reform Act of 1998 §3202 and Internal Revenue Manual (220.127.116.11 as examples) which takes delinquent filer’s tax overpayments and turns them over to the Treasury. The legal Authority for this is IRC §6511(a), §6511(b) and IRS Regs §301.6511(b).
Similarly for non-filers the Assessment Statute Expiration Date (ASED) and Collection Statute Expiration Date (CSED) need to be considered. Also see IRC §6501 for Limitations of assessment and collection and this JofA article regarding the 6-year statute.
Millions of dollars are forfeited each year by unknowing taxpayers who waited too long to file their old tax returns. The basic rule is that you mustn’t file more than 2 years or in some cases 3 years late if you want to protect your tax overpayment.
IRM 18.104.22.168, IRS’s Basic Guide for Processing Cases with Statute of Limitations Issues.
IRM 22.214.171.124.18, IRS’s Policy Statement 5-133 for six year limit on accepting delinquent tax returns.
IRM 126.96.36.199.1(4), IRS’s Enforcement Determination enforcement of filing requirements will normally be pursued for a six year period.
Extending the Statute Expiration Date
U.S. Code § 6501 – Limitations on assessment and collection.
Basic Guide for Processing Cases with Statute of Limitations Issues lists various conditions which extend the Assessment Statute Expiration Date.
IRS Publication 3920 special rules on filing claims for an individual affected by a terrorist attack
Rev. Proc. 99-21 extending due to taxpayer’s financial disability
IRS Publication 556 suspended due to taxpayer’s financial disability
Periods of financial disability. If you are an individual (not a corporation or other taxpaying entity), the period of limitations on credits and refunds can be suspended during periods when you cannot manage your financial affairs because of physical or mental impairment that is medically determinable and either:
- Has lasted or can be expected to last continuously for at least 12 months, or
- Can be expected to result in death.
Note: The period for filing a claim for refund will not be suspended for any time that someone else, such as your spouse or guardian, was authorized to act for you in financial matters. To claim financial disability, you generally must submit the following statements with your claim for credit or refund:
- A written statement signed by a physician, qualified to make the determination, that sets forth:
- The name and a description of your physical or mental impairment,
- The physician’s medical opinion that your physical or mental impairment prevented you from managing your financial affairs,
- The physician’s medical opinion that your physical or mental impairment was or can be expected to result in death, or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months, and
- To the best of the physician’s knowledge, the specific time period during which you were prevented by such physical or mental impairment from managing your financial affairs, and
- A written statement by the person signing the claim for credit or refund that no person, including your spouse, was authorized to act on your behalf in financial matters during the period described in paragraph (1)(d) of the physician’s statement. Alternatively, if a person was authorized to act on your behalf in financial matters during any part of the period described in that paragraph, the beginning and ending dates of the period of time the person was so authorized.
update: Court strengthens IRS ability to force a forfeiture of tax overpayments in Wachovia Bank v. U.S. 7/13/06. In this case the taxpayer filed a tax return and paid taxes when there was no requirement to file or pay the taxes at all. In other words the taxpayer filed an unnecessary tax return. No taxes were due. When the taxpayer got around to filing for a tax refund several years later, the IRS refused citing RSED.
Deposit vs. Payment
There is potential relief from this confiscatory penalty if you know a little trick, which we will share with you here. Under IRS Rev Proc 84-58 (as codified and superseded by Rev Proc 2005-18) taxpayers should consider not making their prepayments of tax as 1) estimated tax payments or as 2) payments of tax accompanying their extension request – but rather they may make deposits in the nature of a cash bond.
A remittance made that is designated by the taxpayer in writing as a deposit in the nature of a cash bond will be treated as such by the IRS. Such a deposit is not subject to a claim for credit or refund as an overpayment. The taxpayer may request the return of all or part of the deposit at any time before the Service is entitled to assess the tax. Generally, that amount will be returned to the taxpayer, without interest, unless the Service determines that assessment or collection of the tax determined to be due would be in jeopardy, or that the amount should be applied against any other liability. In such a case, the deposit will not be returned, but will be applied against a jeopardy or termination assessment or against the other liability.
update: Congress amended the Code to provide that overpayment interest would be payable on certain deposits made after October 22, 2004, and later returned to the taxpayer (§6603(d), added by §842(a) of the American Jobs Creation Act of 2004, P.L. 18-357)
To make a deposit which will qualify for payment of interest by the IRS, a taxpayer should send a check or money order to the IRS office where he is required to file his return or to the IRS office where his return is under examination accompanied by a written statement designating the remittance as a deposit. (Rev. Proc. 2005-18). The statement must include the type of tax, the tax year, and a description and explanation of the disputable tax. (To compute the disputable tax amount, taxpayers may use any reasonable method. Rev. Proc. 2005-18, §7) Otherwise, the remittance will be treated as a payment and applied against any outstanding liability.
A qualifying deposit is not subject to a claim for credit or refund until it is applied by the IRS as payment of an assessed tax. A taxpayer can, however, obtain the return of a deposit (and interest thereon) by delivering to the IRS a written statement identifying the deposit and requesting its return. (Rev. Proc. 2005-18, §6)
Click here for for the IRS webpage regarding Filing Past Due Tax Returns.
As has been the case starting with 2011, taxpayers with any financial account maintained by a foreign financial institution or any securities issued by someone that is not a U.S. person may be required to file IRS Form 8938 along with their regular income tax forms. Taxpayers are subject to a $10,000 late filing penalty and the burden of compliance for some European institutions is too expensive and has resulted in closing accounts held by U.S. citizens.
Click here if you have questions about how we can help.
Including help applying for and complying with the IRS Fresh Start Initiative:
Six year look back
When dealing with a non-filer, normally the IRS will go back six years. Enforcement beyond such period will not be undertaken without prior managerial approval. Also, if delinquency procedures are not to be enforced for the full six year period of delinquency, prior managerial approval must be secured. See IRM 188.8.131.52.18 (08-04-2006) Policy Statement 5-133
§60620(b) Substitute For Return – Service Filed Return (SFR)
As if the above RSED program wasn’t enough, the IRS also has an SFR program to force your tax returns to be filed, even without your assistance. You wont be happy once you have an SFR!
Click here first to discover why you should retain us to represent your interests before the Internal Revenue Service.
Click here to see newspaper story about non-filers
Click here to see IRS seizures up for auction
See IRS Publication 3598 for information on using “audit reconsideration” to resolve an SFR matter.
See IRM 184.108.40.206 Substitute for Return for more information.
A new attack against delinquent filers somewhat limits their ability to negotiate the amount of taxes due for offer in compromise or bankruptcy proceedings.
The courts have said that only a tax return can be renegotiated. To have filed a tax return a document filed with the IRS must
- purport to be a tax return
- be signed under penalty of perjury
- contain enough information to enable a taxpayer’s tax liability to be calculated
- “evidence an honest and reasonable endeavor to satisfy the law”
In Re Payne [431 F.3d 1055 December 2005] and In Re Colsen [No 05-2476 8th Cir, may 4, 2006] have differing views regarding #4 above. #4 cannot be met if the IRS has already filed an SFR (which is almost always the case for delinquent filers) This is because an honest and reasonable endeavor to satisfy the law would include filing timely. So even in bankruptcy, Payne could not get a discharge for the taxes he owed!
Collection Due Process Hearing
What Is the Deadline for Requesting a Collection Due Process (CDP) Hearing?
Your request for a CDP hearing about a proposed levy must be postmarked within 30 days after the date of the Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice).
Your request for a CDP hearing about a Federal Tax Lien filing must be postmarked by the date indicated in the Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320 (lien notice).
Your timely request for a CDP hearing will prohibit levy action in most cases. A timely request for CDP hearing will also suspend the 10-year period we have, by law, to collect your taxes. Both the prohibition on levy and the suspension of the 10-year period will last until the determination the IRS Office of Appeals makes about your disagreement is final. The amount of time the suspension is in effect will be added to the time remaining in the 10-year period. For example, if the 10-year period is suspended for six months, the time left in the period we have to collect taxes will increase by six months.
You can go to court to appeal the CDP determination the IRS Office of Appeals makes about your disagreement.
Assets exempt from IRS levy, IRC § 6334
Non-Collection Due Process (CDP) Offers
Offer in Compromise
The IRS may accept an offer in compromise based on three grounds:
- Doubt as to Collectability – Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection. Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
- Doubt as to Liability – A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence. Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
- Effective Tax Administration – There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable. Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
IRM 220.127.116.11.17, IRS’s Policy Statement 5-100 goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.
Taxpayers wishing to pay off a tax debt through an installment agreement, and owe:
- $25,000 or less in combined tax, penalties, and interest can use the Online Payment Agreement (OPA) or call the number on the bill or notice (have the bill or notice available, along with the social security number). A fill-in Request for Installment Agreement, Form 9465, is available online that can be mailed to the address on the bill.
Note: If you recently filed your income tax return and owe but have NOT yet received a bill from the IRS, you can use the Online Payment Agreement to establish an installment agreement on current year returns. To determine the information needed to establish a pre-assessed installment agreement, refer to What Information Do I Need to Use OPA?
- More than $25,000 in combined tax, penalties, and interest may still qualify for an installment agreement, but a Collection Information Statement, Form 433F may need to be completed. Call the number on the bill or mail the Request for Installment Agreement, Form 9465 and Form 433F to the address on the bill.
You will receive a written notification telling you whether your terms for an installment agreement have been accepted or if they need to be modified. There is a user fee charged by the IRS of $120 or less. There is a discount for agreeing to direct debit of your bank account.
IRS Status 53 – Currently Not Collectible
Hardship situations, upon request, can result in the IRS avoiding contact for 12 months at a time once a “Status code 53” is assigned to the taxpayer’s account. After having been in Status 53 for ten years, the debt becomes uncollectible. Also see some information here and here.
Currently Not Collectible Policy and Procedure Overview
- Policy Statement P-5-71 provides the authority for reporting accounts currently not collectible (CNC). See IRM 18.104.22.168.14 Policy Statements for Collecting Process . Accounts can be removed from active inventory after taking the necessary steps in the collection process.
- Accounts may be reported CNC for a variety of reasons using transaction code (TC) 530. It is a requirement that TC 530 be defined by the appropriate closing code. The most commonly used closing codes are displayed in the table below.
Currently Not Collectible Closing Codes Closing Code Definition
03 inability to locate the taxpayer or assets
04 partial expiration of the assessment prior to issuance
05 complete expiration of the statutory period for collection or suit initiated to reduce tax claim to judgment
06 for International casework, inability to collect a liability from a taxpayer living in a foreign country
07 a corporation, exempt organization, or Limited Liability Company (LLC) , where the LLC is identified as the liable taxpayer, liquidated in bankruptcy
08 death of an individual with no collection potential from the decedent estate or no collection potential for estate taxes
09 accounts below tolerance See IRM 22.214.171.124.5(1) and (2) Tolerance, for additional information
10 corporations, certain limited liability partnerships, exempt organizations, or LLCs, where the LLC is identified as the liable taxpayer, which are inactive and defunct with no assets
12 inability to contact a taxpayer although the address is known and there is no means to enforce collection
13 a corporation, exempt organization, limited partnership, or LLC, where the LLC is identified as the liable taxpayer, remains in business and is current but is unable to pay back taxes
14 when suspending collection of BMF balance due accounts when the key individual is deployed to a combat zone; see IRM 126.96.36.199.1 ,Business Masterfile (BMF) Accounts of Taxpayers Deployed to a Combat Zone, for additional information
15 corporate income tax liabilities owed by a financial institution certified as insolvent by the Office of the Controller of the Currency or the Office of Thrift Supervision
24 – 32 collection of the liability would create a hardship for taxpayers by leaving them unable to meet necessary living expenses
Reminder: Hardship closing codes can only be used for individual or joint IMF assessments, sole proprietorships, general partnerships, and LLCs, where an individual owner is identified as the liable taxpayer.
VDP – Voluntary Disclosure Practice
A taxpayer’s timely, voluntary disclosure of a substantial unreported tax liability has long been an important factor in deciding whether the taxpayer’s case should ultimately be referred for criminal prosecution. It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.
IRS Tax Seizure Auction website: http://www.treas.gov/auctions/irs/