Come in out of the cold

April and May are the months when the people who haven’t filed taxes in a long time wander into the tax lawyer’s office. It can be a decade or more since they last filed.  

For the law-abiding among us, such a lapse in filing seems incredible, but for 40 years, each year I have brought five to 10 taxpayers “into compliance,” meaning they file enough years of returns to satisfy the IRS.  

It is the exceptional case when the IRS even knows of the existence of these errant taxpayers. Right now I have two cases that have completely dropped off of the IRS radar. In one instance, the taxpayer had an accident 18 years ago and was brain injured. Then he moved from one coast to the other. He now does handyman work. In the other case, the woman left a religious order and to make a living, started painting the interiors of houses. (Neither of these people are local.) 

The reason the IRS didn’t find either of these individuals is that no 1099 for services is issued unless it is a business expense. And both of these people provide personal services to homeowners – hence not a trace of payment. They are an example of the underground economy you have heard of. Not all of it is crime-related. 

What the savvy tax person does for these people is to file either six or seven years of tax returns. The statute actually says 10 years, but the IRS dumps much info after seven years, and this is done right after April 15. If a return has not been filed, all info is gone after the data dump. The six or seven year period is chosen, depending on how close we are to the April 15 IRS data dump.

Both the painter and the handyman have turned 60 and it is time to be thinking of Social Security and Medicare. The self-employed pay FICA and Medicare through their tax return, so that if no tax return has been filed, they are not eligible for either benefit. 

But what about paying the tax? A person will go from having no tax due to some multiple of $10,000 when the returns are done. My simplest advice in this circumstance is to pay your current year taxes using estimated payments. Once you have established a regular quarterly payment of estimated tax, the IRS will make a moderate plan based on your actual disposable income. You can even do it online if you owe less than $50,000, and you won’t have to talk to anyone.

If you run into an intractable situation (or a stinker of an IRS employee), you may want to structure your business life so that your business is not subject to levy. That’s when you call the tax lawyer.  

Martha Miller is a tax attorney from Lime Rock. None of the information here should be seen as an endorsement of her business.