The Non-Filer – A Case that Never Ends Well

February 23, 2016


 

In my short career as an Internal Revenue Service Revenue Agent, an issue I usually liked working was a non-filer case.  Generally, IRS is only interested in the past six years of returns.  IRM 4.19.17.1 provides details on how IRS deals with non-filers. “The Non-Filer program, also known as SFR (Substitute for Return), and its automated version, Automated Substitute For Return (ASFR) were developed to contact taxpayers who have not filed tax returns voluntarily and for whom income information is available to substantiate a significant income tax liability.  IRC § 6212 authorizes the Service to send a notice of deficiency when a taxpayer appears to have a filing requirement but does not comply by voluntarily filing a tax return.”

The IRS has the authority to prepare returns for any person who fails to submit a return required by law or regulation or makes (willfully or otherwise), a false, or fraudulent return. IRC § 6020(b) provides that the return is prima facie good and sufficient for all legal purposes; however, despite this language, for most purposes of the IRC, the §602 0(b) return is not treated as a return filed by the taxpayer. For example be aware of the following:

  • The amount shown as due on an IRC § 6020(b) return must be assessed under the deficiency procedures.
  • An IRC § 6020(b) return does not start the statute of limitations on assessment.
  • An IRC § 6020(b) return does not stop the Failure to File (FTF) Penalty.
  • An IRC § 6020(b) return prepared using the Married Filing Separate (MFS) filing status will not prevent taxpayers from electing a Joint filing status under IRC § 6013(b).
  • IRC § 6020(b) pertains to individual income tax returns. Such returns may be automatically generated by the Campus or manually prepared with reports of proposed tax adjustments.
  • When the taxpayer has not filed an individual income tax return, the Service needs to create a valid IRC § 6020(b) return to apply the Failure to Pay (FTP) Penalty.
  • The Tax Court does not consider a mere assessment of tax or FTP penalty to constitute a "return" under the provisions of IRC § 6651(a) (2) and will not sustain the penalty. Therefore, to sustain a FTP penalty on a taxpayer who has not filed a return, the Service must, IN ALL CASES, properly process an IRC § 6020(b) return or have the taxpayer sign an appropriate return.
  • Remember refunds can be barred, a client has three years from the due date of the tax return to claim a refund for that year.

A Certification process must take place and IRM 4.18017.1.2 provides the details of the process.  In addition, the following letters are commonly used in the non-filer process.

Letter 105C – Claim Disallowance – Barred Refund.

Letter 106C – Partial Disallowance.

Letter 143C – Missing Signature.

Letter 474C-Math Error.

Letter 692 – Response to the taxpayer before Statutory Notice Of Deficiency (SNOD).

Letter 555 – Response to the taxpayer after SNOD.

Letter 692 (SC) – Response to the taxpayer, Revised Report.

Letter 1862 – Initial Contact Letter (ICL). This is considered a combo letter as the Form 4549 Examination Report will also be sent as part of the initial contact.

Letter 2469C – ASFR Possible Refund.

Letter 3219 – Statutory Notice of Deficiency (SNOD).

Letter 4391 – Non-Examination closure.

Letter 4392 – Combat Zone. Examined/Non Examined closure

Where all this becomes important is when that new client who hasn’t filed for a group of years walks into your office.  Where do you begin or, perhaps a more important question is, “Is this a client I want to help?”

There are some steps that you need to take to properly assist a non-filer client, keeping in mind that the time spent generally is more time than originally anticipated.

  1. A complete and thorough interview of the client.
  2. Determine what or if any records are available.
  3. Determine what years have or have not been filed.
  4. Determine filing status and dependent information which can change from year to year.
  5. Check for multiple states and or moves the client had during those years.
  6. Was a business entity (or multiple entities) created and check to see if those returns have been filed.
  7. Were employees involved if a business entity was established?
  8. Has IRS filed a substitute for return (SFR) on the client?
  9. Has the client received any IRS letters or assessment of tax?
  10. Determine if both state and federal returns have been filed.
  11. Is reconstruction of records going to be required?
  12. Get a feel for how important “getting in compliance” is with the client. They generally have greater motivation if they want to buy a house, they are filing for bankruptcy or they are getting married and one partner wants to resolve the issue.

Where Do You Start?

Once the interview has been completed and you have decided to take on the client, the process begins.  Use Form 4506-T to obtain information on what years have been filed and what information documents have been filed with IRS and the Social Security Administration.  Two areas on the Form 4506-T will be required to be filled out on separate forms.  Multiple forms may need to be filed to request all the information needed, as the form limits the request to four years or periods.  See samples below for Verification of Filing and requesting Form W-2, Form 1099, Form 1098 or Form 5498.

Verification of Filing

Form W-2, Form 1099 series, Form 1098 series, or Form 5498 Series Transcript

You can also request a Record of Account which provides the most detailed information, as it is a combination of the Return Transcript and the Account Transcript. This is available for the current year and 3 prior tax years. Most requests will be processed within 10 business days.

The form instructions provide a fax number to send the request.  Note that depending on what is requested the fax number may be different.

Another issue to remember is other entities that the client may have created and whether payroll is an issue.  In these cases, the flow through or corporate returns may need to be prepared first to complete a Form 1040.  Documents can be requested as needed per Form 4506-T.

 

 

 

Want to view entire articles or watch the videos?