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How Does the IRS Develop a Delinquent Tax Return Case Against a Taxpayer

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How Does the IRS Develop a Delinquent Tax Return Case Against a Taxpayer

Taxpayers have many reasons and justifications for their failure to file taxes or their filing of tax returns or other documents that are deficient. Deficient tax documents may fail to include certain material elements of one’s finances or they may inaccurately reflect the taxpayer’s income, expenses, and other financial characteristics. Filing a deficient tax return can and often does open the door for IRS scrutiny or even a tax audit. It is essential to note that, in the interest of reducing multiple contacts with taxpayers, raising a red flag due to a deficient filing typically results in examiners determining whether the taxpayer is fulfilling all Federal tax obligations. Therefore, following contact by an IRS agent, taxpayers should be prepared to address any and all deficiencies that may exist regarding their tax filings.

Initial Assessment of the Delinquent Tax Document

When an auditor determines that a taxpayer has likely failed to file certain tax documents, he or she is instructed to determine the tax periods for which the deficiency occurred prior to soliciting any tax documents from the taxpayer. While the examiner may not have all relevant tax returns available at this initial stage, he or she is guided by an array of tax data contained in IRS systems. IRS systems that will aid the examiner in this determination include:

  • BMFOLI – This system will show the tax filing history of the taxpayer by tax filing period.
  • IRPTRI – This IRS system will show a summary of all income documents — including 1042-S, W-2, W-2G, 1099-MISC, and 1099-R – that have been filed by the taxpayer. This system can also indicate the years for which employment tax return documents are required.
  • BMFOLE – this system is often relevant for business owners and former business owners. This system can show whether a taxpayer has taken steps to wind down a business.

There are many other systems that the IRS examiner can utilize, but this synopsis accounts for some of the systems that frequently relevant. If a return was not filed but deemed required the examiner will attempt to discover why the taxpayer failed to satisfy this obligation. What the examiner discovers during this inquiry is frequently the difference between facing criminal tax charges and lesser fines and penalties.

What if the Examiner Believes the Taxpayer Intentionally or Voluntarily Failed to Satisfy the Tax Filing Obligation?

Generally speaking, criminal tax charges require the government to prove intent by the taxpayer. Typically, the government must be able to carry the burden that the taxpayer willfully avoided, evaded, or otherwise endeavored to defeat a tax or collection of a tax. When indicators of fraud are present making willfulness more likely, the examiner will consult with the group manager and then the Fraud Technical Advisor. If there is a possibility of fraud, the examiner will not request delinquent returns, payment of tax, or any agreement from the taxpayer. Rather, the matter will be referred to IRS Criminal Investigations for further assessment. If an examiner abruptly cuts off communication without providing a reason, it is often a sign that the inquiry is about to go criminal. At this point, it is prudent to contact a criminal tax defense lawyer.

What Happens if the Examiner Decides that Fraud is Unlikely?

If the examiner concludes that no signs of fraud are present and that the likelihood of fraud is low, the investigation will proceed along a different track. In this case, the investigator is likely to inform the taxpayer that he or she has failed to file certain tax documents or has filed otherwise  delinquent documents. He or she is also likely to inform the taxpayer that all delinquent returns, penalties, and interest are due immediately. The examiner will set a date for which the returns are due and inform the taxpayer that a failure to comply will constitute a refusal to file.

Has the IRS Contacted You About Delinquent Tax Returns?

If you have been contacted by the IRS regarding allegedly missing or otherwise delinquent tax returns, don’t face an examination without legal guidance. If you make certain admissions during the course of this audit, you could face serious criminal tax charges that carry a potential federal prison sentence.

Don’t face an audit or an examination without the careful guidance of a tax lawyer. The tax attorneys at the Tax Law Office of David W. Klasing may be able to fight for you to mitigate the fines and penalties you face. To schedule a reduced-rate and confidential legal consultation, call 800-681-1295 today.