“To File or Not To File, That is the Question”

by Michael Hale From the Author

In 2009 John spent a lot of money on braces for his daughter and when he prepared his 2009 tax return in March of 2010 he had a balance due of over $5,000, which due to the cost of the braces he had no funds available to pay to the Internal Revenue Service.  So he made the choice to not file the 2009 tax return.  When he went to prepare his tax return in March 2011, for the 2010 tax return, he remembered he had not filed the 2009.  Since he had no contact from the IRS on the prior missing return, and afraid to bring attention to this fact, he decided to not file the 2010 tax return, and the same thing happened for the 2011, 2012, and 2013 tax returns.  The IRS finally realized he had not filed these returns, and prepared the returns for John.  When the IRS files your returns, called a SFR (Substitute For Return) they file you as married filing separate, no business deductions, and no credits.  They then send you a statement of the proposed tax liability and you either pay this amount or prepare your own accurate returns and arrive at the proper tax liability.

When you file a tax return, the IRS normally has 3 years from the due date or the date filed to examine this return, and 10 years to collect any tax liability from these returns.  When you choose to not file the tax return in a timely manner these statutes, the time left to examine or perform collections,  never starts.  Even when the IRS files for you and have a liability these time limits do not start running.  When you have a filing requirement, for either a refund due return (you lose the ability to receive a refund after 3 years) or a liability, file on time to avoid additional penalties for late filing or non-filing.  Once the return is filed the IRS will work with you on a payment plan, reduction in liability, or other plans to keep you on track and in compliance.  Not filing the return will not make the liability go away, and will only make it harder to resolve tax issues.  If you are not in compliance with filing your returns they have no reason to work with you and grant any relief. Your tax professional can help you resolve he back year tax problems, work with you to not have a tax due return in the future, and let you rest assured the IRS is being taken care of to avoid additional problems.

When John met with his accountant to prepare these missing tax years, and correct the returns filed by the IRS, he had a tax liability of less than he imagined, they worked out a payment arrangement, and finally was able to stop worrying about the IRS seizing his bank account and wages.  Not filing due to inability to pay will never be the smart thing to do, and if you plan you can avoid so many problems. If you have a really large tax liability the IRS can and will work with you so long as you are in compliance and provide them with the information they need to assist you.

For more information on the different options available to resolve prior tax issues consult a tax professional, or of the amount owed is less than $50,000,contact the IRS directly and they will work with you.  Using a tax professional will make ot easier, as they talk to the IRS on a regular basis, and can further explain the options available to you

Business codes and their implications.

by Michael Hale Daily Notes

When you file personal (filing as a sole-proprietorship), corporate, or partnership income tax returns there are numerous ways that the IRS uses information to track your business. The social security number, federal employer identification number, date of business formation, and also your business activity code.  As I will explain the use of the wrong code can lead to examination by the Internal Revenue Service.

Suppose for this example that you operate a plumbing business, in any of the above mentioned entity choices.  The business activity for a plumber is 238220.  This six-digit code is based on the North American Industry Classification System (NAICS) and can be found on the IRS website at www.irs.gov.   The IRS will use this code as a reference for all of the plumbing companies that file income tax returns.  They have a set formula for a basis for the type of and amount of expenses that will be reported on these tax returns.  A plumber will have a different type of expenses than an electrician, a drywall installer, or a landscaper.  The ratio of certain expenses, such as cost of goods, labor, small tools, and travel will be different for a plumber than other business types.  If you as a plumber use a code for a drywall installer (code 238310) and have a lot more in sub-contractor or small tools expense than a plumber normally has it will cause the IRS program to take notice.  If you have more in supplies (as a percentage of overall expenses) than all the other plumbers using the correct code you will have another item to notice.

The IRS has a program that keeps score of these noticeable differences and when there are enough of them your return will be selected for a cursory review. (This is the DIF SCORE-Discriminate Income Function) Based on this review the IRS will either see the error in the code used and close the review, or see other items for consideration and send the return to the field for an agent to review.

Before you file in future years review your business code and be sure it represents your business. Review the IRS Publication for small businesses for other important information regarding your business and items the IRS will consider when reviewing your return.