With the October 15 tax filing deadline approaching, remember taxpayers who received extensions that an extension to file is not an extension to pay — and failing to file can create significantly larger problems down the road.
Steven Klitzner, an IRS tax resolution attorney with FloridaTaxSolvers.com, joined Good Morning Keys on Keys Talk 96.9/102.5FM this morning to talk about taxes.
October 15 is the deadline for taxpayers who received extensions on returns that originally were due April 15, including individual 1040 returns and C corporation returns.
“Extensions are not for payments, but for filing,” Klitzner said. “If you miss this, then you’re going to get hit with a late filing penalty, which maxes out at 22 and a half percent.”
The penalty can increase by 4.5% per month, making it important for taxpayers who are still on extension to get their returns filed as soon as possible.
Klitzner recently encountered a client whose returns had been prepared but whose filing had not yet been completed. He was working with a CPA to try to get the returns filed within the two-week window before the deadline.
“It could cost him $20,000 or $30,000 if he doesn’t file it on time,” Klitzner said.
Klitzner also emphasized that taxpayers should not avoid filing simply because they cannot afford to pay what they owe.
A taxpayer who fails to file may actually make the situation worse, he said, because the IRS’ 10-year collection statute generally does not begin running until the return is filed.
“A lot of folks say, ‘Well, I don’t have the money, so that’s why I didn’t file,’” Klitzner said. “I get that, but for the most part, you save a lot more money if you at least get the returns filed.”
Klitzner said his office frequently sees taxpayers who have allowed their tax problems to grow because they were overwhelmed or did not know where to begin.
He gave the example of one client who had failed to file returns for several years and owed approximately $50,000 in older taxes. Klitzner said the IRS generally requires the taxpayer to file the most recent six years of returns in such a situation, rather than necessarily requiring every missing return going back decades.
While the client was not being treated as a criminal case, Klitzner said the taxpayer would have to address the outstanding debt.
“He took what he took a loan from the IRS for 10 years, and now he’s paying it back with penalty and interest,” Klitzner said.
Klitzner also discussed a much more serious situation involving a taxpayer who deliberately reported false income in an attempt to qualify for a mortgage.
According to Klitzner, the man initially reported earning about $10,000. A mortgage broker then told him he would need to show income of more than $100,000 to qualify for a mortgage.
The taxpayer amended his tax return and falsely reported earning more than $100,000. He also provided the false information to the mortgage company. The mortgage ultimately was not approved, but the taxpayer later approached Klitzner about amending the return again to reflect his actual income.
Klitzner said the situation could potentially expose the taxpayer to allegations of both mortgage fraud and tax fraud.
“If you get audited, if someone looks at this, if someone digs deep into this, I mean, you could go to jail for mortgage fraud,” Klitzner said. “You lied to the mortgage company. You also lied to the IRS.”
Klitzner said taxpayers need to consider the consequences before attempting to manipulate their income or tax returns.
“When you think, ‘What could go wrong?’ The answer is usually a lot can go wrong,” he said.
Another client may have compounded his tax problems by receiving income in cash that was not reported. Klitzner said criminal cases involving the IRS are generally reserved for situations in which taxpayers have taken significant steps to intentionally evade their tax obligations.
“The typical person doesn’t file returns, overwhelmed, doesn’t live large, scared, doesn’t know where to begin,” he said. “They’re not going to be able to convict that person.”
However, he said someone who is earning substantial income, living a high-income lifestyle and intentionally failing to file returns can draw greater scrutiny.
Klitzner also discussed the role of tax professionals in resolving IRS cases. He said taxpayers should not assume the IRS will view hiring an attorney negatively.
“They love when there’s a representative on the case,” Klitzner said, referring to legitimate representatives who actually work with the taxpayer and the IRS. “Now the IRS has someone to deal with.”
Klitzner said his job is to assemble the taxpayer’s financial information, returns and other documentation and work toward a resolution with the IRS.
Taxpayers are ultimately responsible for ensuring the information on their returns is accurate, even when an accountant or tax preparer is involved.
Klitzner said one potential problem arises when a taxpayer’s reported financial statements do not match the activity in their bank accounts.
He cited an example in which financial statements showed a business earning about $2,000 per month while $5,000 per month was being deposited into the owner’s bank account.
“Where’s that money coming from?” Klitzner said. “That’s what we always have to figure out.”
The IRS can compare bank statements with financial information reported on tax returns and expects the numbers to make sense.
Klitzner said large or unusual deductions can also draw attention. In one recent case, a taxpayer earning a substantial income claimed a seven-figure charitable deduction.
According to Klitzner, the taxpayer had become involved with a promoter who allegedly sold a tax deduction scheme. Klitzner said the deduction appeared to be fabricated and that the taxpayer could ultimately owe taxes on approximately $1 million.
He said the taxpayer had also been working with a representative connected to the promoter and that the case had continued for years.
Klitzner said taxpayers should not ignore IRS correspondence when letters begin arriving.
He also encouraged taxpayers who are significantly behind on their taxes to focus first on getting current.
“If you’re on extension, get the return filed by October 15,” Klitzner said. “And at least the best advice I give people who are far behind is at least start now going forward. File on time, pay on time. We can always deal with the past.”
Taxpayers seeking assistance with IRS tax matters can contact Klitzner’s office at 305-682-1118 or through FloridaTaxSolvers.com.