TaxProTalk.com

I would greatly appreciate your thoughts on how best to advise a good friend's mother.

IN 2010 & 2011 this lady aka the grandmother, took her 2 grandchildren in to live with her while grandchildren's parents were divorcing (unstable home). Her tax returns were prepared by CPA claiming HOH, 2 dependents, CTC and EIC. In 2013 she was audited. Proof of relationship & copies of paid bills were provided but IRS also wanted evidence the children lived with her. Although she had added them to her lease in 2010, by 2013, the apt management had changed hands and previous management records were not in good shape. New management handwrote a note that the children were on her lease but IRS wanted it on letterhead which they did not want to provide. Additionally the school (etc) records were not to changed to grandmother's address because parents wanted to keep up with children's report cards etc. directly.

My friend, moved out of state for a few years so quit monitoring grandmother's situation. Meanwhile, grandmother is financially illiterate and didnt know what to do so she did nothing. She also quit filing (she may have filed 2012).

IRS assessed $7K/yr addl tax plus interest, penalties (including accuracy) in 2013. The last letter (LT16) she received in 2015 had an accrued balance for both years of over $20K. She hasnt received any other notifications but she has moved a few times.

She has a job earning less than $18K per year and has managed (over several years) to put away a modest 401(k) through her employer of less than $6K. She is now 59, is considered legally blind (still works), & can no longer drive. I assume she is considered currently non collectible as the IRS has not garnished her wages.

My friend moved back, mom(grandmother) moved in with my friend who drives her to (30miles)& from work (shift hrs). If she can keep working until 2021,when she is 62, IRS will garnish 15% of her small social security check. The SOL should close in 2023.

I roughed up the last 4 years of returns, averaging $1300 refund per year. I also ran through the OIC qualifier, but because I estimate she has no living expenses (lives with my friend & no longer owns a car), I used the IRS allowance for expenses and she fails to qualify.

Would the IRS have prepared SFRs and applied the old refunds to her balance?

Would she be a good candidate for OIC based on Doubt as to Liability? Or ETA? I hope she wouldnt have to liquidate her 401(k).

She spoke to an attorney who told her to have the IRS reopen the 2010 & 2011 audit and have her son write a letter than he had custody of the grandchildren (who lived with her). Is this a viable option?

I know she needs to come into compliance but would like an overall best approach to help her resolve this and I dont want to misstep if I can help it.

Thanks for your thoughts/advice.

IRS does not SFR returns that would end up with a refund. First, they are not in posession of all the information you have and second, they aren't in the business of refunding money to non-filers.

So, file all the missing returns. The refunds for years where the statute is still open will be applied automatically. After that, if the expense to do an Audit Reconsideration isn't prohibitive, go that route. Based upon the information you supplied, she would not be a good Offer candidate.

Consider BK - to discharge the tax debt - appears to be beyond the 3-year priority period.

novacpa wrote:Consider BK - to discharge the tax debt - appears to be beyond the 3-year priority period.

If I am understanding correctly, the 2012 tax year was the most recent return filed by her, and the main tax problem is with the unfiled 2013 return. If this is the case, the three year rule probably would not help her at this point. She would have to file the 2013 return now, and then wait at least two years before filing her bankruptcy petition to try to make the 2013 tax be non-dischargeable -- at least, nondischargeable in a straight chapter 7 bankruptcy (see generally 11 USC section 523(a)(1)(B)(ii)).

I believe there is also some case law to the effect that under 11 USC section 523(a)(19), a tax for ANY late-filed return is not dischargeable, because the definition of "return" for this purpose is a "return that satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements)" (emphasis added). I need to check on that.

I checked, and the case involving the interpretation of the word "return" in section 523(a)(19) is McCoy v. Mississippi State Tax Commission (In re McCoy), 666 F.3d 924 (5th Cir.), cert. denied, 113 S. Ct. 192 (2012). Although the facts of the case involved state tax returns, this Fifth Circuit holding (covering Texas, Louisiana and Mississippi) would apply to Federal tax returns as well.

However, the Court did indicate a possible exception for a return filed late under a "safe harbor" provision such as Internal Revenue Code section 6020(a) or a similar state law.

A section 6020(b) return would not qualify.

Thank you for the replies. I appreciate this board so much!

In her case, I am concerned about the 2010 & 2011 returns as that is where the tax assessment was. Those years were timely filed as she received CTC & EIC for those years.

I dont know (yet) if she had filed 2012 but she stopped in 2013 as she got scared when she began receiving the IRS notices. The 2015-2018 roughed up returns each have refunds averaging $1300 each. I have every reason to believe when 2012 -2014 are prepared they too will have refunds as she was having more withheld than she needed to and is not one to go in and change anything. She only had low W2 income, no dependents & standard deduction so they are simple returns.

I haven't ordered transcripts/acct records but that is my next step.

I also hadn't considered bankruptcy.

Don't consider bankruptcy because SFR assessments are not dischargable. You don't say how old they are but it sounds like they are approaching the end of the line. If you can come up with sufficient documentation an offer based on doubt as to liability may be worth a shot although the collection statute is extended while it is being considered. If you have done four years of returns, at least one of them is going to be past the statute of limitations to collect the refund.

2015-2018 have been prepared but not filed yet, each year has refunds between $1100-$1300.
2012, 2013 & 2014 were previously filed with refunds.
2010's & 2011's tax assessment statute expires in 2022 & 2023.

TP would like to reopen 2010 & 2011 to see if the IRS would consider abating the taxes(int&penalties), but really doesn't have any new evidence to proove TP was entitled to HOH, EIC & CCCr. This doesn't seem wise as it would toll the statute.

TP has modest salary and must be "currently uncollectible" but that may change when the 2015-2018 returns are filed.

TP is seriously considering BK in Florida, to protect a modest 401(k) which the only asset the TP has (no car, no real estate etc).

Can the TP's 2017 & 2018 refunds can be exempted under FLorida's wildcard $4K exemption if TP has no other assets? TP is 62 and mostly wants to get rid of this issue before retiring.

You might consider contacting National Taxpayer Advocate's Help LIne .(1-877-777-4778)

Why would you old refunds on a 2015 return to late now? If you hope to wait collection to pass - how do you go to OIC now??

TP probably isnt a good candidate for OIC, and yes, it is too late for TP to get credit for the older refunds

I wish that practitioners would STOP advising people to call the Advocate's office when there is NO reason to do so. NONE.