Questions for the Tax Lady: August 23rd, 2009

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: I recently filed late returns for years 2000-2008. All income was from traditional employment. All but 3 years show a return, and total owed for the 3 years is about 8K. I fully expected to be fined/penalized/interest assessed, etc. for those owed taxes. However, the last 3 years (06,07,08) should have given me a refund of over 60K. I got notices from the IRS that ALL of the money was applied to money owed from the tax years 2002 and 2004. It seems like I should be getting some type of refund, what should I do?

First of all, I would suggest getting a full review of your tax account with the IRS to determine exactly what money is owed, and from which years. My law firm offers a Tax Account Review service, as do other tax resolution companies. You could even call the IRS and work to get the information yourself, but IRS representatives can frequently be difficult to work with.

Since your refunds should have come from the past three years, then you are not entirely out of luck. Unfortunately, the IRS will only hold a taxpayers refund for three years, but they can come after you for taxes owed from over ten years ago. Once you get the information from your tax review, you should be able to request any refund you are owed. On the other hand, if you find out that you still do owe the IRS, then you can always negotiate for a settlement. Call 1-888-TAX-LADY to speak with one of my representatives who can help you determine the best solution to your tax problems.

Question #2: I'm an independent contractor. If I include extra expenses while filling my tax returns will I be more likely to get audited?

No, as long as all of the expenses you list are legitimate business expenses you will have nothing to worry about. According to the IRS, “a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”

I can File Late, I've got a Refund Coming Anyway

Yesterday afternoon a colleague of mine sent me a link to this article from Roth & Company’s Tax Update Blog explaining how important it is to file your tax return on time, even if you are expecting a refund. Check out their article below, with an example of a Pennsylvania woman who had to learn the hard way that you should never wait to file a return.

Cynthia Doyle had a refund coming of $12,785.02 for 2002, including $10,000 she paid with an extension request. If she ever filed her 2002 return, the IRS had no record of receiving it, and Ms. Doyle apparently had no evidence that she had filed. The IRS contacted her in October 2006 asking for her return - conveniently after the statute for limitations for a 2006 refund had expired.

While the taxpayer said she had filed on time and had asked for the overpayment to be applied to her 2003 taxes, the IRS said it was up to her to prove it:

However, absent being eligible for an exception under § 7502, a taxpayer's own uncorroborated testimony to show timely mailing is not enough to establish a presumption of delivery under any view of the law.

In this case, plaintiff does not allege she used either registered or certified mail when she sent her original 2002 Tax Return. See Complaint at Paragraph 47 ("I have never sent tax returns certified mail..."). Absent proof of such mailing, plaintiff is ineligible for the § 7502(c) exception to the physical delivery rule... In view of the fact that plaintiff cannot establish that she timely mailed an original 2002 Tax Return, the physical delivery rule dictates that plaintiff's 2002 Tax Return was deemed filed when it was received by the IRS on October 30, 2006.

We can take away two things:

- If Ms. Brown thought she didn't have to file because she was overpaid, she was horribly mistaken.

- If Ms. Brown did file on time, spending an extra $5.10 for certified mail, return receipt requested would have really paid off.