If you haven’t filed an income tax return for several years despite being required to, you may be nervously glancing over your shoulder or trying to get motivated to remedy your debt with Uncle Sam, but it’s hard to know where to start.
The idea of approaching the IRS about overdue tax returns can conjure up images of being clamped into handcuffs and carted away. Well, do not fear: The IRS will welcome you back like the prodigal son you are.
The IRS may have filed tax returns for you, called Substitute Filed Returns (SFRs). The information is based on copies of third-party documents the IRS routinely receives in January every year – Forms W2, 1099, K-1, 1098, to name a few. The IRS will then bill you for the tax it comes up with, and that number tends to be considerably higher than it would be if you had prepared the tax return yourself.
The folks who compile SFRs do this on purpose to get your attention. You see, if the IRS files for you, this does not absolve you from your filing requirement, it’s essentially a place holder. Also, the tax liability stemming from the SFR is enforceable until you submit a proper filing. The tax liability from an SFR cannot be discharged in bankruptcy.
So it’s time to get things right. Perhaps you can prepare the tax returns yourself. You may have the data and it may be just a simple income tax return or two or three. If so, you can prepare it and paper file it. You cannot electronically file prior year income tax returns.
But if you do not have all of your records, you will need some help. The IRS can provide you with transcripts of all third-party documents – Forms W2, 1099, K-1, 1098, etc. You can order a transcript of third-party documents by filing Form 4506 available at www.irs.gov. Just keep in mind that it will take some time for the IRS to process this form and send you the results.
Usually it’s faster and simpler to hire a tax professional to obtain the information. A tax professional will ask you to sign IRS Form 2848 Power of Attorney and Declaration of Representative, which means you don’t ever have to speak to anyone at the IRS. In fact, if an IRS agent or officer contacts you, simply tell him to contact your tax representative.
With a signed Power of Attorney, your representative can obtain all of your confidential income tax information. There is a special phone number available to practitioners only. The request can be made for the missing year data and it will be faxed over within 48 hours. No months of waiting.
If you were self-employed during the tax years in question, you may have to compile your income and expenses in order to complete Schedule C of Form 1040. It may be necessary to hire a bookkeeper to prepare a profit and loss statement for you. If you do not have your records, the IRS will allow reasonable estimates. In fact, one auditor used industry standards from www.bizstats.com to compare to an existing schedule C as the taxpayer’s records had been lost after several moves.
Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.