I had a real life experience recently, which I’d like to share with you, as it’s a perfect example of why you should file your income tax returns timely, and NOT ignore notices from the IRS.
A new client was referred to me last year, who hadn’t filed any tax returns since 2003, so she needed my help with 2004 through 2009. It’s been almost a year since I wrapped up all those returns, but the problems that were lurking a year ago have not gone away, and in fact, have gotten worse.
As I was in the process of getting the information from the client that I needed to prepare all those returns, I found out that the client had received numerous notices from IRS for the 2004 through 2006 tax years, in particular. The notices requested tax returns for each of the years, but my client didn’t reply to the notices. IRS then sent notices saying that since she didn’t reply to the original notices or submit returns, they were computing the returns themselves, based on information received from payors (i.e. W-2s, 1099s etc), and gave her a deadline to reply and/or submit returns. She didn’t do either. IRS then assessed and billed her for the balances on the ‘returns’ that they computed, and she didn’t pay them. The next step was liens that showed up on her credit report, and then collections. The problem now (and why this has gotten more complicated) is that as far as IRS is concerned, 2004-2006 are closed cases/years, meaning, they computed the returns, the client’s lack of reply was taken to mean that she agreed with their computations, and they just want their money. As of today, IRS is saying that the client owes them about $142,000!
I spent about three hours on the phone with four different IRS representatives, trying to get a handle on what was going on, and what needs to be done, to straighten this all out. What we have to do now is re-submit 2004-2006 and ask IRS to re-open those cases/years and reconsider the returns, which show a total balance due of only about $4,000 for the three years, not $142,000! I was told it could take months to hear back about the reconsideration of these returns, and there’s no guarantee that IRS will agree, and adjust the balances down to what they’re supposed to be.
After the call with IRS, I called my client, and in the course of the conversation, I asked her why she never filed all those returns, and her answer was that she was expecting refunds for those years, and had never previously owed tax to IRS. I told her that if she was expecting a refund, then that’s even more incentive to file on time, so she could get her money back, and not give an interest free loan to IRS (see my Apr 25 article).
It’s taken hours of my time to date, and will take a lot more time to get to the end of this. All of it could’ve been avoided if the client had just filed her tax returns on time. So the moral of the story is, even if you’re expecting a refund, get your taxes done timely, so you can get your refund back. You might even get an unpleasant surprise, and find out that you have a balance due, when you thought you were getting a refund. Either way, it’s way better to find out before IRS gets involved!