Dear Tax Guy,
My husband is 81 years old and I am 68. He was a banking professional for many years and retired in 2007.
He always handled our finances but became ill a few years ago. I took it upon myself to sort out our tax situation and was appalled to find he had not done our taxes after 2018. He got sick in 2019 and is unable to manage our finances. I’m working with a tax preparer who filed for an extension for 2022 since she can’t get to us until after April 18.
Will the IRS take into consideration that my husband was ill and I had no idea that our taxes had not been filed? Will we be penalized with a huge amount? I thought it was only last year’s taxes which weren’t filed and would never have let it go this long. He always assured me everything was alright and said “don’t worry about it.”
Picking up the pieces
Dear Picking,
Most of all, I hope your husband’s health improves and I hope you are hanging in.
You’re already on the right track by hiring a tax professional. Even if she can only get to your returns after the April 18 filing deadline, paying for a pro easily sounds worth the time and expertise.
Depending on when he became ill and wasn’t able to do the taxes, we’re talking three or four years of unfiled returns: tax years 2018, 2019, 2020 and 2021. Yes, it’s something that has to be fixed. But here’s perspective. When I talked to the former IRS National Taxpayer Advocate for a different question about overdue tax returns, she recalled a onetime client who had 15 years of unfiled taxes. Three or four years seems doable in that context.
First off, I don’t know the full context of your tax situation. (Maybe you are learning that too.) But if it turns out that you and your husband do not owe taxes when the returns are prepared, the IRS will not assess failure to file and failure to pay penalties.
The catch is people have three years to file a return before the Treasury Department snatches away a refund that would have been coming their way. This year, the general deadline to file a 2019 return and claim a refund is July 15, an IRS spokesman said.
It might be tight, but your tax preparer would have three months to submit the 2019 return. And you have ample time to submit the 2020 and 2021 returns, two tax years when pandemic-era credits, like money for any missed out stimulus checks, would boost a refund.
But I sense you want to know what happens if you owe. The failure to pay penalty is one half of 1% of the unpaid tax, accumulating each month, up to a maximum 25%. Meanwhile, the failure to file penalty is 5% of the unpaid tax, for each month, going up to a 25% maximum. And then there’s the assessed interest.
Let’s start with the good news. The tax man has ways to offer a break on penalties and interest, according to Brad Gould, a Florida Bar board-certified tax lawyer with Comiter, Singer, Baseman & Braun LLP in Stuart, Fla.
That starts with the first-time penalty abatement process, he noted.
The IRS said penalty abatement qualification hinges on whether “you have been and are currently tax compliant.”
The IRS says current compliance includes filing an extension, which you’ve done. It also includes payment of taxes or a repayment plan for “all the taxes due for years other than the one you’re requesting relief for.”
Past compliance includes not receiving penalties in the previous three years. As a hypothetical, the IRS says someone would have a history of good compliance if they sought abatement for their 2021 return and didn’t have unresolved penalties on their 2018, 2019 and 2020 returns.
“If the penalty is waived, interest on the penalty goes away with it. Interest accruing on the tax cannot be undone,” Gould noted.
Form 843 is a way to request the abatement. If the IRS will not grant abatement, the same form is the way to invoke your second line of defense, Gould noted: reasonable cause for penalty relief.
“Death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family, may establish reasonable cause” on the obligations to timely file and pay taxes, according to the IRS.
Regrettably, that’s not the end of the analysis, said Letha Sgritta McDowell, shareholder at Hook Law and the immediate past president of the National Academy of Elder Law Attorneys.
The IRS will likely want to know the full backstory about why years went by with unfiled taxes — and they might be tough to persuade, she said.
It’s something she sees in tax court decisions on the topic and in her own experience preparing client’s tax returns or the final tax returns wrapping up the financial affairs of their deceased relatives.
(Tax Court is where taxpayers and the IRS go to resolve legal fights over IRS determinations. It is an independent judicial forum that isn’t connected to the IRS. Decisions are appealed to the U.S. Court of Appeals.)
In a 2002 ruling, the court sided with the IRS refusing reasonable cause relief to a small business owner who had undergone prostate cancer treatment for years, contracted Lyme disease and was receiving chemotherapy for lung cancer. The court said it was “sympathetic,” but noted the man’s wife was around to potentially help, as well as an accountant who helped file extensions.
The decision itself noted it shouldn’t be regarded as binding authority. But McDowell’s point is get ready for the IRS to want to know more about the facts and circumstances at play. Like when you found out about the unfiled taxes and if you handled other financial duties that could’ve conceivably alerted you to the need to file returns.
“Temper expectations, because they may request extra information and look at the totality of circumstances,” she said.
There’s the chance for penalty abatement and the next step of seeking reasonable cause.
It’s an effort worth pursuing — even if it’s going to take some persuading. “Like with everything, if you don’t ask, the answer is always ‘no,’” McDowell said.
Got a tax question? Write me at: akeshner@marketwatch.com
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I’m not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.
I’m here for the reader who faces their taxes with an air of resignation. You’re just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze — with money at the end. Or a trap that you need to avoid.