I have a set
of tax returns in my office for someone who dropped off the tax grid for years.
I suspect we will be fighting penalties and requesting a payment plan in the too-near
future.
It reminded
me of why not filing returns is a bad idea.
Here’s one:
she has refunds she cannot use because the statute period has expired.
She could
have used the refunds, as she has other years with tax due.
There is
another reason.
Let’s say
that you file a return, but you file it late. For example, you extend the
return to October, but you don’t get around to filing until the following
January or February. You have a refund so you do not care.
Many tax
professionals would agree with you. Penalties apply on tax due. If there is no
tax due, then – voila – no penalty (generally speaking).
But you later
amend the return. Or the IRS adjusts the return for you. However it happened,
you now owe tax.
Consider
this:
§
6651 Failure to file tax return or to pay tax
In case of failure-
(1) to file any return required under authority […]on the
date prescribed therefor (determined with regard to any extension of time for
filing), unless it is shown that such failure is due to reasonable cause and
not due to willful neglect, there shall be added to the amount required to be
shown as tax on such return 5 percent of the amount of such tax if the failure
is for not more than 1 month, with an additional 5 percent for each additional
month or fraction thereof during which such failure continues, not exceeding 25
percent in the aggregate;
This is called
the “late filing” penalty.
I am looking at a tax case from 1998. Greg Vinikoor (GK) married Melissa Vinikoor (MV). Best I can figure, her dad must have been loaded, as he was repeatedly transferring shares of stock to the newlyweds. GK graduated from college and took a job making $12 grand a year. They got everything out of that $12 grand, including:
· trips to Hawaii, San Diego,
Scottsdale and San Francisco
· shopping trips to Saks Fifth Avenue,
Neiman Marcus and Nordstrum
· membership at the Tucson Country Club
We both know
that they were not paying for this on that $12,000 salary. They were either
borrowing against or selling stock that dad had transferred.
The IRS
wanted to know why they were not reporting stock gains on their tax returns.
There had been quite the run-up in value since dad had acquired the stock. In
the case of a gift, dad’s low basis in the stock would carryover to the couple.
Since gain = price – basis, that low basis meant a juicy gain, and the IRS
wanted its cut.
Good
question.
Uhhh…. Because
we bought the stock from dad, they answered. Yeah, that’s it. We have a new –
and higher! - basis because we bought the stock. We bought it on loan, and we
have to pay dad back.
Fine, said
the IRS. Show us the loan agreement.
Don’t have
one, they replied.
Show us
where you paid interest to dad.
We haven’t –
not yet, they responded.
Is there a
fixed repayment date?
Just an
understanding, they susurrated.
How about
security? Did you give any collateral for the loan?
No, not
really, they murmured.
The Court
was zero impressed.
After the stock rose, XXX [dad], the supposed creditor in these transactions never made any demand on petitioners for repayment, even though the value of the stock had increased substantially and petitioners were diminishing the stock with spendthrift habits.”
The Court
decided this was a gift. There was gain, there was tax.
Guess who
failed to file their tax return on time?
Yep, the Vinikoors.
Now they had
penalties.
More
specifically, that 25% penalty we talked about. It totaled over $38 grand.
And there is
the trap. That late filing can haunt and hurt you if you later amend or the IRS
adjusts the return to increase income. That penalty goes to back when, not the
date you amended or the IRS adjusted.
File those returns
on time, folks. Amend later if you do not have all the information, but at
least you got the horse over the wire on time.
Our case
this time – as you may have guessed – was Vinikoor
v Commissioner.
