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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 their RSED plan for "Normal Refund Statute Extension
Date" which takes delinquent filer tax overpayments and turns them over
to the Treasury. The legal Authority for this is IRS Code
§6511(a), §6511(b) and IRS Regs §301.6511(b).
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.
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 vrs. 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Proc 84-58 (as codified and superseded by Rev Proc 2005-18) taxpayers should consider not making their prepayments of tax as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, 2005-1 C.B. 798. See the
explanation above at ¶3840.01.B.3.b.(2)) 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)
also see
Susan C. HARRIGILL v. UNITED STATES of America - May 31, 2005
As if the above RSED program
wasn't enough, the IRS also has a
SFR program to force
your tax returns to be filed, even without your assistance. You
wont be happy once you have a SFR!
Click here first to discover why you should retain
us to represent your interests before the Internal Revenue Service.
Click
here
to see IRS site information for non-filers
Click
here
to see more IRS site information for non-filers
Click here
to see newspaper story about non-filers
Click
here
to see what happens to those who do not file proper tax returns
Click here
to see IRS seizures up for auction
A new attack against
delinquent filers somewhat limits their ability to negotiate the
amount of taxes
due for offer on 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 a 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!
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.
Mark-to-Market election gives you
ordinary loss treatment
"Retroactive" mark-to-market elections for non-filers are a definite
possibility. See us for the proper way to accomplish this.
Recently we have seen some free instructive advice on the internet that over-simplifies and misses the point on what has been
briefly mentioned
on this page
and other pages on the traderstatus.com website for several years.
Missing the whole point when using one of these over simplifications can result in a disallowance as a tax
motivated sham.
We have the experience. These are not "new ideas" to us.
Actually, the IRS has consulted with us specifically about these type of
daytrader tax motivated shams (prepared elsewhere) discussing their
viability and substance (or lack thereof). We will opine on your
specific situation and which filing methodology is best for you. Good
planning, keeping a low-profile and having support for tax positions
taken is imperative. "Making it up as you learn" is the sure way
to an audit.
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.
http://www.irs.gov/newsroom/article/0,,id=104361,00.html
State - Voluntary Disclosure
Program
Arizona
California
Entities with CA nexus
Connecticut
Kansas
Maryland
New Jersey
New York
Pennsylvania
Utah
Vermont
National
Nexus Program
IRS Tax Seizure Auction website:
http://www.treas.gov/auctions/irs/
Why retain us to handle your
delinquent IRS (and State) tax returns.
IRS controversy
issues, tax return audits and even routine IRS and State
inquiries are best handled by a professional CPA firm,
rather than going it alone and risking "putting your
foot in your mouth". Taxpayers signing a special IRS
limited Power of Attorney may
retain us to represent them
with many of these issues. Contact us before you contact
the IRS in response to an imposing inquiry.
Why use TraderStatus.com for your trader tax advisor?
TraderStatus.com is the Web Site presence of Colin M. Cody, CPA, CMA.
Colin advises Security Traders and CPAs across the country regarding
complex trader status issues. Colin has been advising Security
Traders on the Internet since 1991.
Colin M. Cody, CPA, CMA has been instrumental in the authorship of the
actual and forthcoming securities trader Tax Code by working with the
drafters of the IRS Code while interpreting the intent of the US
Congress when they pass the law.
Audits are handled for taxpayers in any of the U.S. States either by
communicating with the IRS examiners via telephone, fax and mail or by
transferring your case to Connecticut for face-to-face meetings with the
IRS examiners and appeals officers.
More often than not Colin finds errors in the preparation of the tax
returns under audit. The errors made on self-prepared tax filings
are responsible for initiating some audit inquiries. Errors we
find on professionally prepared returns are usually only found after a
thorough review of your paperwork back in our offices and sometimes
these have quite severe misinterpretations of the law.
It is not uncommon for us to find that taxpayers have overpaid their
taxes in prior years because regular tax rules were used rather than the
proper Trader Status allowances.
If errors favor the taxpayer and your taxes were overpaid, then we may
prepare proforma drafts of amended tax filings to present to the IRS
examiner during the audit. If the
errors favor the IRS and your taxes were underpaid, then then we
prepare for the possibility that the IRS examiner will also find those
same mistakes.
Click
here if you are ready to retain us
for your audit representation.
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When a
POA
is signed by you and then submitted by us to the IRS, we can get
involved for a speedy resolution to these five common "IRS inquiries"
- IRS Account Problems Inquiry
- Complex IRS Refund Inquiry
- IRS Notice Inquiry
- IRS back taxes Installment
Agreement Inquiry
- Lost Payment Tracer Inquiry
During a Follow-up Inquiry we can
submit additional information on a previously submitted inquiry.
RSED law:
6511(a) Period Of Limitation On
Filing Claim
Claim for credit or refund of an overpayment of any tax imposed by this
title in respect of which tax the taxpayer is required to file a return
shall be filed by the taxpayer within 3 years from the time the
return was filed or 2 years from the time the tax was paid,
whichever of such periods expires the later, or if no return was filed
by the taxpayer, within 2 years from the time the tax was paid. Claim
for credit or refund of an overpayment of any tax imposed by this title
which is required to be paid by means of a stamp shall be filed by the
taxpayer within 3 years from the time the tax was paid.
6511(b) Limitation On Allowance
Of Credits And Refunds
6511(b)(1) Filing Of Claim Within Prescribed Period
No credit or refund shall be allowed or made after the expiration of
the period of limitation prescribed in subsection (a) for the filing
of a claim for credit or refund, unless a claim for credit or refund is
filed by the taxpayer within such period.
6511(b)(2) Limit On Amount Of
Credit Or Refund
6511(b)(2)(A) Limit Where Claim Filed Within 3-Year Period
If the claim was filed by the taxpayer during the 3-year period
prescribed in subsection (a), the amount of the credit or refund
shall not exceed the portion of the tax paid within the period,
immediately preceding the filing of the claim, equal to 3 years plus the
period of any extension of time for filing the return. If the tax
was required to be paid by means of a stamp, the amount of the credit or
refund shall not exceed the portion of the tax paid within the 3 years
immediately preceding the filing of the claim.
6511(b)(2)(B) Limit Where Claim
Not Filed Within 3-Year Period
If the claim was not filed within such 3-year period, the amount of the
credit or refund shall not exceed the portion of the tax paid during the
2 years immediately preceding the filing of the claim.
6511(d) Special Rules Applicable
To Income Taxes
6511(d)(1) Seven-Year Period Of Limitation With Respect To Bad Debts And
Worthless Securities
6511(d)(2) Special Period Of
Limitation With Respect To Net Operating Loss Or Capital Loss Carrybacks
6511(d)(2)(A) Period Of Limitation
If the claim for credit or refund relates to an overpayment attributable
to a net operating loss carryback or a capital loss carryback, in lieu
of the 3-year period of limitation prescribed in subsection (a), the
period shall be that period which ends 3 years after the time prescribed
by law for filing the return (including extensions thereof) for the
taxable year of the net operating loss or net capital loss which results
in such carryback, or the period prescribed in subsection (c) in respect
of such taxable year, whichever expires later. In the case of such a
claim, the amount of the credit or refund may exceed the portion of the
tax paid within the period provided in subsection (b)(2) or (c),
whichever is applicable to the extent of the amount of the overpayment
attributable to such carryback.
6511(g) Special Rule For Claims
With Respect To Partnership Items
In the case of any tax imposed by subtitle A with respect to any person
which is attributable to any partnership item (as defined in section
6231(a)(3)), the provisions of section 6227 and subsections (c) and (d)
of section 6230 shall apply in lieu of the provisions of this
subchapter.
6511(h) Running Of Periods Of
Limitation Suspended While Taxpayer Is Unable To Manage Financial
Affairs Due To Disability. --
6511(h)(1) In General. --
In the case of an individual, the running of the periods specified in
subsections (a), (b), and (c) shall be suspended during any period of
such individual's life that such individual is financially disabled.
6511(h)(2) Financially Disabled.
--
6511(h)(2)(A) In General. --
For purposes of paragraph (1), an individual is financially disabled if
such individual is unable to manage his financial affairs by reason of a
medically determinable physical or mental impairment of the individual
which can be expected to result in death or which has lasted or can be
expected to last for a continuous period of not less than 12 months. An
individual shall not be considered to have such an impairment unless
proof of the existence thereof is furnished in such form and manner as
the Secretary may require.
6511(h)(2)(B) Exception Where
Individual Has Guardian, Etc. --
An individual shall not be treated as financially disabled during any
period that such individual's spouse or any other person is authorized
to act on behalf of such individual in financial matters.
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