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A new look at the delinquent taxpayer issue.

Practitioners across the country are being informed of an ever-increasing problem--the issue of the delinquent taxpayer. At a recent Internal Revenue seminar, practitioners were told that in one state alone there are 149,000 delinquent taxpayers. When asked to define a delinquent taxpayer, an Internal Revenue spokesperson stated that "any taxpayer who has not filed tax returns, when required, is considered a delinquent taxpayer." This definition covers a multitude of types of returns and is excellent in pinpointing the magnitude of the problem.

The issue is not a simple one to understand. At first glance, one might think that all that is needed is for these taxpayers to file their returns. Veteran practitioners, however, know that the ultimate solution is much more complex and time-consuming.

A brief review of the reasons for non-filing is essential. Many taxpayers are victims of some sort of traumatic experience: a marital dissolution, the death of a spouse or loved one, loss of a job and more recently, natural disasters such as floods, earthquakes and the like.

Other potential reasons for non-filing might include: a job transfer that results in either the loss of good records or an inability to locate those records; a military transfer in which the taxpayer believes he or she is unable to file due to being stationed in a foreign country; bankruptcy filings that interrupt the normal filing process; unemployment and a serious illness that requires long-term health care and eventually long-term institutionalization. Hence, we see that the reasons for non-filing are numerous and complex.

It is the author's opinion that the emergence of better and more sophisticated electronic equipment has enabled us to become more aware of the delinquent taxpayer issue. My intent in the remainder of this article is to share my experience as a tax practitioner with others, to reveal the dilemma of the delinquent taxpayer and then to suggest possible solutions that may be helpful to other practitioners.

In public practice, it is very difficult to categorize taxpayers because of the diversity of businesses, wide income differences and dissimilarity of services offered to various clients. In an effort to describe problem areas and possible solutions, a practitioner must explain some very difficult experiences and then try to analyze them in order to draw accurate conclusions.

The following four case studies will each serve as an example of a taxpayer problem. Due to privacy limitations and obvious disclosure rules, the author will not use names or other exact descriptions in referring to a particular client.

Case Study I

This taxpayer might best be described as close to an impossible situation. My initial contact with this taxpayer, the owner of a small business, revealed that no records were available. Payroll information was kept on small cards and such basic items as bookkeeping entries, tax returns and financial statements were non-existent. Demand notices for tax payments were stacked high in a small room and were based on estimates. W-2 and W-3 forms had not been filed for at least five years.

The astonishing element about this taxpayer is that his business still operated day by day and no one appeared concerned about the financial status or tax status of the company.

My first approach to resolving this situation was to prepare a summary of taxes due. When I gave this list to the owner, he asked if I was serious! I assured him that I was.

It seemed that an educational approach was needed. When I gave him a short quiz on form numbers and tax terminology, it became clear he knew nothing about taxation. Further questioning and interviews revealed that the taxpayer was not a businessman. He did, however, have some redeeming qualities! He had the unique ability to make others like him and to get along well with the public. He was a master at public relations, and this seemed to be the driving force behind the business.

Many hours and months went by as I tried every possible means to communicate to this taxpayer his responsibilities under the tax law. We set up a journal to record daily transactions and a ledger. His records were stored in huge boxes located in several different areas. In his effort to consolidate, the taxpayer even rented a storeroom to compile and record at least 10 years of voluminous records. The situation, as indicated earlier, was close to impossible.

My services to the taxpayer included explaining tax notices, installing some form of organization to his records, representing before the Internal Revenue Service and ultimately in Federal bankruptcy court. It was during this time that I finally realized the truth about this taxpayer: he did not want records that were honest and accurate; he refused to pay any type of tax without some form of force; and any effort by an accountant would be stymied indefinitely.

The experience I have cited here is one in which many practitioners may have found themselves. To date, I have found no solution to this type of delinquent taxpayer problem. Given no records or cooperation, only the Internal Revenue Service can handle such a taxpayer.

Case Study II

It is interesting to note that practitioners often must spend a lot of time with a taxpayer before they can determine how best to serve them. Many factors must be considered before the practitioner really knows his client.

The experience I had with our next delinquent taxpayer was most unique. When we first met, the taxpayer was operating a dry cleaning store. He told me he already had an accountant. I recall telling him, "I wouldn't want to step on anyone's toes!" He replied, "Please, step on his toes!"

His reasons became clear in our introductory conversation. This businessman was experiencing several difficulties, including cash flow problems and a poorly set-up partnership arrangement. Creditors were calling constantly, demanding payment.

It was obvious that the company's debts were out of control. Threatening letters, lawsuits and demand notices were common and unending.

Did the taxpayer need to know the due date of his Form 1040? Were the rules for filing a single W-2 form paramount in his mind? Ironically, his tax situation was on the bottom of his list of priorities. To him, survival was the key word.

How could I be of service to this taxpayer? Organizing his paperwork was the starting point. I learned that when the taxpayer had purchased the business, he had also acquired a substantial list of liabilities involving large sums. An inventory of assets was taken and the taxpayer eventually sold the business. During the same year, this taxpayer bought and sold a second business.

The question might be asked, "Why didn't this taxpayer file his return this year?" This taxpayer was not aware that a computation was needed to be made in both businesses to determine whether the sale resulted in a profit or a loss. Prior to this computation, however, the transactions of both businesses had to be recorded and posted.

In situations such as these, the practitioner has several jobs. He or she must advise the client of the problem, solve the problem and the, justify his charges for these services. Only through patience, persistence and a large amount of time can such problems be worked out.

Many aspects of tax practice are not cut and dried and many value judgments are needed to produce a successful outcome. The role of the practitioner in such matters is a crucial one.

Case Study III

Many practitioners have had experience with the next type of delinquent taxpayer. Termed the "procrastinator," this taxpayer is much too busy to be bothered with such "trivial" details as filing tax returns. He is too busy at his business of making money and can allow his accountant only a few minutes.

The practitioner, in turn, is constantly facing deadlines, either self-imposed or mandated by tax law. In this instance, his job is to respectfully remind the taxpayer that his return is due and unless the necessary information is made available, no further progress can be made towards filing the tax return. The goal is--compliance without losing a client.

In my own experience, the irony in this case was that the taxpayer had sufficient income to pay the tax, penalty, interest and the professional accounting fee. His payment of these obligations would not materially affect his financial position.

Why, then, did he not file his tax returns? Many theories could answer this question. The author would suggest an attitude of indifference caused by some traumatic experience, a reluctance to accept pressure or an inability to handle pressure, some confusion as to the interplay between national politics and tax administration, the lack of demand or pressure from government authorities or even an unconscious reluctance to "get down to business."

To resolve the question of why taxpayers do not file their returns, the taxpayer must be willing to cooperate with the practitioner.

Case Study IV

Generally, ignorance is not an acceptable reason for non-filing. It would be much too easy for a taxpayer to plead ignorance of the law or a filing deadline. Ironically, an experience I had was a perfect example of non-filing due to ignorance.

The taxpayer had become involved in a business with a relative, all very innocently. The relative had bad credit, so the taxpayer "helped out" by signing documents indicating he was the owner of the business. What he could not know was that his relative would default on his employment tax and that my client would be held responsible. I became aware of the situation after he had paid a large 941 liability.

The taxpayer was not aware of what his payment included or that he was responsible for the Schedule C and all related taxes. His dilemma was that he had paid a large liability for his relative but had no control over the business receipts or, for that matter, any of the business operations. To make matters even worse, this relative was the taxpayer's only remaining relative and lived right next door.

Was the taxpayer responsible for this tax? And would there be more taxes for him to pay as time went on?

My first step was to have the taxpayer sign a power of attorney form; from this we learned that additional taxes were in fact being assessed. Next, I contacted an attorney since I knew that, as things stood, legal assistance might well be required.

This case study illustrates how a taxpayer, under certain conditions, can become involved in a tax position in which he is uncertain about how to file a return or that one is even due. Here, the taxpayer was caught between loyalty to his only living relative and his obligation to file a complete and accurate tax return.

After several months of meetings, debates and negotiations with the IRS, the taxpayer's original payment was eventually refunded and he was not held responsible for the tax liabilities.


In summary, the delinquent taxpayer issue is enormous, complex, difficult to understand and ultimately affects us all. Through the advanced technology of our day, we as practitioners have become introduced to the problems and numbers involved. The case studies presented are only a few illustrations of the author's experience with this situation. I am sure many practitioners have equally interesting and unique stories to tell.

The solution to this complex problem of non-filing, in my opinion, rests squarely on the shoulders of the accounting practitioner. Education, cooperation and a spirit of working for the common good appear to be the ultimate answer to this most aggravating question.

John R. Williams is a member of the National Society of Public Accountants with a degree in business administration from the University of Indianapolis. Enrolled to practice before the IRS, he is also an accredited tax advisor and tax preparer. He has been in public practice for more than 25 years and has maintained his PA licensed in Indiana since 1970.
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Article Details
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Author:Williams, John R.
Publication:The National Public Accountant
Date:Dec 1, 1993
Previous Article:Surviving a tax audit without records.
Next Article:Conference on Professionalism in Tax Practice: building a better tax system.

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