Questions for the Tax Lady: October 18th, 2010

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: If an "Offer in Compromise" was rejected in 2007 for taxes owed 2001 and 2002, does this affect the Statute of Limitations?

Generally, the IRS has 10 years to collect any unpaid taxes from you. The clock starts running when the IRS officially assesses the taxes – not when you filed the return, or when the taxes were originally due.

Submitting an Offer in Compromise causes the Collection Statute Expiration Date (CSED) to be suspended; which means the clock stops running once the IRS receives your offer and determines that it is processable. Once your offer was rejected, the clock started running again. This means that if you Offer in Compromise was under review for 90 days, an additional 90 days was added on to the CSED dates for you 2001 and 2003 back tax debt.

To sum it up: Your new CSED will be extended by the length of time the IRS reviewed your offer, plus 30 days. For example, if your original CSED was May 15, 2012, and the IRS took 4 months to review your offer before ultimately rejecting it, your new CSED would be October 15, 2010 (add the four months the IRS was reviewing your offer, add on 30 more days).

Question: I filled an automatic six month extension in April, but forgot to get my tax return in by last week's deadline. What should I do Roni?

You need to file your return immediately. The penalties for not filing pile up quickly, so it is in your best interests to file your return as soon as possible. If you will not be able to pay the amount of taxes owed, file anyway; pay what you can, and call the IRS to request an installment agreement for the rest.

The IRS Has $1.3 Billion for People Who Have Not Filed a 2006 Tax Return

The Internal Revenue Service announced that 1.4 million people did not file a federal income tax return for 2006. Now, when a taxpayer is entitled to a refund but does not file a tax return, that taxpayer will not be issued their refund—this is called an unclaimed refund. Unclaimed refunds total more than $1.3 billion for the tax year 2006! If you did not file a 2006 tax refund and think you have a refund due, you must file your 2006 return with the IRS no later than Thursday, April 15, 2010.
The IRS estimates the average unclaimed refund for tax-year 2006 is about $604.
There are various reasons taxpayers decide not to file a tax return, some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. $604 is a good reason to file your 2006 tax return. Here’s the bottom line: taxpayers only have three years to file a tax return to claim a refund; after the three years have passed, money that should have been yours, becomes property of the U.S. Treasury. For 2006 returns, this three year window closes on April 15, 2010. Though back-year tax returns cannot be filed electronically, taxpayers can still speed up their refunds by choosing to have them deposited directly into a checking or savings account. If you need help getting back tax years filed hire a tax professional.

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.

IRS Offers Tips On Late Filing And Tax Scams

From The Sentinel:

You meant to do your taxes, but the next thing you knew the April 15 tax deadline passed. According to the Internal Revenue Service, you can still file your tax return, even if you didn't ask for an extension, and in some cases you won't even face a penalty. The IRS also offers tips on recordkeeping and how to protect against tax related scams.

What if you have not filed yet?

Electronic filing is available until Oct. 15 for extension and late filers. IRS e-file is the most efficient way to prepare your taxes, particularly taking into consideration the latest tax changes including the Recovery Rebate Credit, First-Time Homebuyers Tax Credit, Additional Standard Deduction for Real Estate Taxes and the Educators Expense Deduction. E-filing will ensure you do not miss out on any tax breaks. Also, taxpayers who earn $56,000 or less can file for free and online at the IRS.gov Web site using the Free File Program.

For the traditional paper filer, tax forms and instructions are available at the IRS.gov website.

"If you overpaid your tax by April 15 and will get a refund when you file, there's no late filing penalty," said New Jersey's IRS spokesperson Gregg Semanick. "The penalty is based on the amount not paid by April 15. But don't get too relaxed — you have only three years from the due date to file for that refund. Miss that deadline and you kiss the money goodbye."

If you have not yet filed your tax return and you owe, file immediately to minimize the late-filing penalty based on the unpaid balance. The late-filing penalty is 5 percent per month up to five months that a return is outstanding. File your return and pay as much as you can. The IRS will send you a notice for the balance due and will charge interest and penalties only on the unpaid balance. You can also request a payment plan prior to receiving the IRS notice.

You can ask to make monthly installment payments. You can apply for an IRS installment agreement using the IRS Web-based Online Payment Agreement application on IRS.gov. This Web-based application allows eligible taxpayers or their authorized representatives to self-qualify, apply for, and receive immediate notification of approval. You can also request an installment agreement by submitting a completed Form 9465, Installment Agreement Request, either when you file the return or when you later get a notice from the IRS. "Missing the tax deadline isn't the end of the world. But doing something now will be the end of your worrying about it." Semanick said.

What records should be kept?

You must keep records so that you can prepare a complete and accurate income tax return. The law does not require any special form of records. However, you should keep all receipts, canceled checks or other proof of payment, and any other records to support any deductions or credits you claim.

Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA, and business or rental property — should be kept longer.

You should keep copies of tax returns you have filed and the tax forms package as part of your records. They may be helpful in amending filed returns or preparing future ones.

For more information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals.

How to recognize tax scams?

Even after tax season, there are numerous scams in which people receive unsolicited emails, phone calls or faxes that claim to come from the IRS, and which request personal and financial information that may be used to commit identity theft. Typically, identity thieves use someone's personal data to empty the victim's financial accounts, run up charges on the victim's existing credit cards, apply for new loans, credit cards, services or benefits in the victim's name, file fraudulent tax returns or even commit crimes.

Anyone who receives one of these bogus emails, phone calls or faxes should avoid responding, clicking on any links or opening attachments. Recipients may forward the emails or report the calls to the IRS using the email address phishing@irs.gov.

Tax Day Countdown

As many of you are well aware tax day is less than a week away, which means you only have a few days left to file your tax returns without being assessed additional penalties or fees. But do not worry if you have not yet filed, you still have time to do something. The worse thing you can do is just ignore the problem, because it will not go away. If you still need to file your return consider the following options:

• File on your own – there are dozens of software programs and websites that walk you through the steps of filing your return. However, be sure not to rush the process as you will not have a professional to review the return.
• Visit a CPA or tax preparation office – you can have experts prepare and file your returns so that you know it will be done correctly. Many tax preparation offices are even open extended hours in the lead up to tax day.
• Call the Roni Deutch Tax Center™ – call the tax professionals at the Roni Deutch Tax Center™ by dialing 800-230-1083, and they can prepare your return over the phone or schedule an appointment at a local office.
• File an extension – if you absolutely cannot file your returns on time then you should at least file for an extension. However, this does not extend your time to pay the IRS. So if you are likely to owe money then you should probably include some type of payment.