Statute of Limitations

[jshtax]

Are there any exceptions to the statute of limitations on correcting an error on a return(error was caused by the former preparer and was no fault of the taxpayer.) It came to my attention yesterday that a clients 2007 corporate return was wrong(unnecessary depreciation recapture on final S Corp return) and it overstated their income by $250k leading to their personal income being overstated. The individual did not file their 07 individual return until December 2010 and is still under an installment agreement.

[Mr. Pencil]

The individual did not file their 07 individual return until December 2010 and is still under an installment agreement.

According to the Instructions for Form 1040X, "Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later."

[jshtax]

I am aware of the instructions was unsure if there were any exceptions.

[Mr. Pencil]

I am aware of the instructions was unsure if there were any exceptions.

Oh, yeah, there's a few things. Nothing easy. Statute is tolled during periods when taxpayer is unable to attend to financial affairs because of a physical or mental disability. There's some legal cases about challenging the date the statute started running, mostly concerned with when a return was considered "filed." Does your client have any unusual circumstances to explain why he waits so long to manage his tax affairs?

There's a whole nother category of statute of limitations for collection--after three years a tax can be discharged in bankruptcy. And of course there is Offer in Compromise, which can be based on doubt as to liability for any year.

[jshtax]

You nailed it. Thanks. I can try an OIC doubt of liability with cause. Cause being preparer error caused an amount of tax that was incorrect.

[Mr. Pencil]

I can try an OIC doubt of liability

Do some research or get help. Any OIC is hard, but doubt as to liability is almost impossible because the taxpayer has already admitted the liability under penalty of perjury. It would be best to show that a new objective fact has occurred, other than just a different preparer has a different opinion. At least document that it WAS a preparer mistake, with proof that the taxpayer had provided all necessary information and that it was reasonable to rely on the preparer. Don't just say so. Prove it.

IRS naturally hates non-filers, so address that issue directly with obvious honesty. It's okay to lay it on real thick, but no B.S. If you have a sob story, make sure all the dates and other facts are documented. Start with a single page summary, and put everything else in numbered exhibits.

Go back to the beginning of each asset in question, documenting its acquisition and business use with a complete schedule of depreciation. Quote the code and regs; don't make the agent have to look them up.

Make a substantial offer, not simply amount already paid. You don't need a financial statement, but include one anyway to show that the taxpayer is making a good faith offer of what he can reasonably afford. Tell the client up front that this will take you at least ten or fifteen hours, probably more. Collect an appropriate non-refundable retainer, and draft a solid engagement letter that states you do not guarantee results. He must maintain the installment payments as an ongoing show of good faith. Approval can take six months to a year. In fact, IRS has no requirement to even acknowledge the offer, though they probably will within a few months. .

Let us know how it works out!

[Lion EA]

Is a substantial amount paid within the last two years? You could get that back without an OIC. But, for the amount you say, your client may want you to chase an OIC or any other tactic. Lay out the expenses, timing, chances, etc., and let him decide.

[kcjenkins]

According to the Instructions for Form 1040X, "Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later."

or within 2 years after the date you paid the tax, whichever is later

If he is still making payments, it's not too late.