Surviving an IRS attack: haven't filed? Joint filer? Here's how to set the record straight

Black Enterprise, Feb, 1995 by Cheryl R. Frank

Formerly with the tax litigation division of the chief-counsel's office of the IRS in the Reagan administration, Cheryl Frank was responsible for resolving IRS controversies for individuals and corporations. Author Frank is a tax attorney and a founding partner of Frank Associates, a law firm that specializes in federal and state tax controversies in Washington, D.C. The following is part two of a two-part excerpt from her new book, How to Survive an IRS Attack.

If you are a nonfiler, go directly your nearest tax professional and file tax returns with the Internal Revenue Service voluntarily.

The IRS is getting more and more sophisticated in tracking those people who have not filed tax returns. The IRS estimates that there are 10 million nonfilers. The IRS is spending a lot of its resources on tracking these nonfilers so that they can achieve full and voluntary compliance. If the IRS finds that you have not filed your tax returns, it may prepare them for you based on the information it has. This information normally comes from W-2's or Form 1099's for interest and dividends. It also may have records or stock or bond transactions. The problem with this is that the IRS will report your stock transactions without deducting your original cost to determine the taxable gain. They also will not take any itemized deductions that you may have. You will then have the burden to resubmit your tax returns based on the correct information.

Before contacting the IRS, you should prepare your delinquent tax returns. Then you should file each return at the appropriate service center. Each year should be filed in separate envelopes so that the IRS does not misplace any of the years. If you file voluntarily, the IRS normally makes the assessments based on your figures. Usually, the IRS does not audit delinquent tax returns on a routine basis. Then you need only deal with collection matters relating to the delinquent taxes, if any.

Many taxpayers have come to me because they have not filed their tax returns for a number of years. Upon preparing the back tax returns, I have discovered that many taxpayers do not owe any money, but have over withheld taxes and are due a refund. However, it is too late to claim the refund. Therefore, the IRS will not refund the money.

FOR BETTER, FOR WORSE, BUT NOT FOR TAXES

You can avoid liability for delinquent taxes if you are an innocent spouse even though you signed a joint return with your husband or wife. of a husband and wife file a joint tax return, both parties assume joint and several liability. The Internal Revenue Code does provide one provision whereby the innocent spouse can escape liability even though you and your spouse have filed a joint tax return. To use this provision, you must prove the following:

* The innocent spouse must have filed a joint tax return with the guilty spouse.

* On the joint tax return, there is an understatement of taxes of at least $500 and such understatement relates to the grossly erroneous items of the other spouse."

* When the innocent spouse signed the return, he or she did not know and had no reason to know that there was a substantial underpayment of tax.

* Based on all the facts and circumstances, it would be inequitable to hold the innocent spouse liable for the guilty spouse's action. The IRS normally looks to whether the innocent spouse received a benefit over and above the normal living requirements. Normally, this defense will be successfully used in the collection process when the IRS is attempting to collect from you, and you believe your spouse had benefit of the unreported funds or original tax savings.

Excerpted from How to Survive an IRS Attack by Cheryl R. Frank; Copyright [C] 1994, Kendall/Hunt Publishing Co. Reprinted by permission.