PRACTICE CORNER FROM THE
No Records, No Problem!
You have a prospective independent contractor/1099 client who needs help with his IRS issue, and he needs to file delinquent 1040 tax returns. He has not filed in years. He then tells you he does not have any records, receipts, or even bank statements! The first thing you need to do is get retained and get his tax transcripts and wage and income (IRP) data from the IRS. Now what do you do? How to Prepare Income Tax Returns for Schedule C Business ClientsWhen No Records Exist, Not Even Bank Statements Not to worry, you can still file returns. The IRS will almost always accept income tax returns based on estimates. You will need an estimate of the annual gross income as a starting point. You should use the website BizStats.com to help in the preparation of these returns. This website reflects the latest available IRS financial information and breaks down average revenue/sales and specific line-item expenses (in terms of percentage by industry, based on years of historical empirical data of returns filed with the IRS). When using this as the basis for preparing returns, you should also attach a statement to the return that states, “This return was prepared based on the best estimates of the taxpayer. All original source documents have either been lost and/ or destroyed. We used BizStats.com, which is based on IRS tax return data, in conjunction with the preparation of this return.” How far back do I need to go to file delinquent returns? IRS Policy Statement 5-133 provides a general rule that taxpayers must file six
years of back tax returns to be in good standing with the IRS. The policy also states that IRS management would have to approve any deviation from that rule, however, if there are SFRs prior to six years, you can always file an original return to replace those returns to reduce the amount owed. Additionally, the IRS can request returns be filed prior to the six- year rule. If your client is a wage earner, you should prepare and attach Form 4852 (Substitute for FormW-2, Wage and Tax Statement) when your client can’t produce W-2s. You can get the information that goes on this form from Income Reporting Program or IRP data obtained from Practitioner
Priority Services (PPS) or e-services. A separate Form 4852 needs to be prepared for each missing W-2. Meeting with prospective clients who cannot produce income records or expense receipts is not uncommon at all with tax problem resolution clients. Get used to it. Do not turn these clients away. This burden has sat on their shoulders for years and has worn them down. They want and need your help and are very willing to pay big bucks to get this behind them. Once the returns are filed and processed by the IRS, you can now work on getting them an OIC, PPIA, streamline IA, or penalty abatement resolution. –Michael Rozbruch
888.670.0303 • 3
Made with FlippingBook Learn more on our blog