Different Statutes of Collection

Jeffrey: Hi. I’m Jeffrey Schneider, and I’m an enrolled agent, and this is We Got Your Back…Taxes. Today we have Steven Klitzner. He’s an attorney who specializes in what we call alternative collection issues. He basically helps you get out of problems with the IRS. So today we’re going to talk about the different statutes that are out there. There’s 3, 6, unlimited, 10-year, and everybody thinks they’re something different. So let’s talk about the three-year statute first.

Steven: All right. Well, the three-year statute of limitations relates to audits, and the IRS only has three years to audit somebody for the most part. Now, that’s three years after they file a return. Now there are times that they can go beyond that. There’s always exceptions to every rule, Jeff, but if the IRS finds a substantial underreporting of income, they can go back six years, and if they think fraud is involved, they can go back forever. But for most people, three years is the amount of time they should know that the IRS could come back and decide they’ll audit that.

Jeffrey: And the three years is also the same thing with requesting a refund for the most part.

Steven: Right. Yeah, there’s always . . . The great thing about the IRS, and that’s what I love about dealing with the IRS all the time, is because I love playing games, and the IRS is all about rules. You read the rules, you know the rules, you can play the game, and you can be successful. We see this all the time.

Someone comes to me, they say, “I want to file my old returns.” And they file some returns four, five, six years ago, and they should have gotten a refund and they don’t. You can only go back three years to get your refund, and three years if you want to make a claim for a refund after you’ve paid the taxes. So you have to be very careful. People always say, “Well, that’s very unfair,” and maybe it is, because the IRS can go back many years and make you file returns. If you owe money, you’ve got to pay it. But if you’re getting money back, you can only go back the three years.

Jeffrey: And you mentioned the three years or six years. Now you said “material understatement of income,” and there’s a percentage with that. What is that percentage?

Steven: It’s 25%, and we don’t see it happen a lot. Even when the IRS kind of knows that it might be 25%, usually they’re happy with the last three years. You just got to be careful, and what we’re talking about also is underreporting of income. So if someone makes a lot of cash and figures, “Well, cash isn’t income. I can just put that in my pocket,” and the IRS catches them, they can go back six years on something like that.

Jeffrey: We’re not talking about overstating expenses.

Steven: Right.

Jeffrey: What we have to let our clients understand is that just because the IRS is looking back for six years of underreporting of income, that doesn’t mean you can overvalue your expenses and they’re not going to come after you too.

Steven: Yeah, that’s true. Then you can get into some fraud.

Jeffrey: Right.

Steven: But let me tell you, when we talk about the IRS going back and we talk about the fraud, the most important thing is that the taxpayer should not talk to the auditor, because I see this happen all the time. The taxpayer goes, meets with the auditor, doesn’t have a representative, and the next thing you know, they start saying this, they start saying that, and all of a sudden the IRS starts looking at fraud. They start going back farther. They hit them with a 75% fraud penalty. So just be very careful out there. Even on the simplest of audits, you need to get some help.

Jeffrey: That’s right, because we can never undo, usually, can never undo what you’ve already done, and I say this almost on every show. That’s why you have a representative, and that three-year statute is called the assessment statute expiration date, which leads me into what is called the CSED. That’s called the collection statute expiration date. That’s an important date too. Let’s talk about that.

Steven: Well, there’s a lot of misconception. Some people come to me and they think the IRS can collect forever. Other people come to me and they say, “Well, the taxes are from 2001. It’s too late. The IRS can’t collect.” Neither one is correct. The IRS has 10 years from the day the return was filed to collect the money on it.

And I just had a gentleman come in yesterday. He brought me some old paperwork. They always bring a stack of envelopes. It’s always unopened.

Jeffrey: Always.

Steven: Yellow around the edges. You open it up, and this puff of smoke comes out. You take a look at, and I looked at it, and those letters were from 2009, and they talked about his taxes from 2000, 2001. I think it even went back to 1999, and he’s very worried. He’s not worried enough to do something about it before now, but he’s worried enough now. What happened is he’s back in the country. He’s got a job. He knows the IRS will catch up on him.

Well, I took a look at the letters, and I couldn’t give him an answer yet. But I told him I think I’m going to have some good news for him, because what I’ve got to do is I’ve got to get the transcripts from the IRS, and that’ll tell me the answer. I have a feeling the 10-year statute of limitations has run and all of those accounts are zero.

Jeffrey: And for my audience, who’s thinking, “What is he talking about transcripts?” There are several things the IRS has that we, as professionals, can get access to, and those transcripts say the tax return was filed on X date, assessed and that’s usually a self-assessed date, and you count 10 years, give or take a week or two, and from that 10 point, basically the tax falls off.

Steven: Right, as long as it was filed then. Just because it’s 2001, if it was filed in 2007, or if the IRS filed for them in 2007, we’ve got to wait until then.

Now, there are some things that extend the statute of limitations, and when you look at the transcripts that we get from the IRS, we’ll see those things. A lot of folks come to me and, “Boy, it looks like more than 10 years must have run,” but when you look at it, they did an offer in compromise, they did a bankruptcy, they requested a collection due process hearing, they have pending installment agreements, and all of that is going to extend the statute of limitations sometimes by many years.

We see cases where they’re 2003, 2004 returns, and there’s another five or six years left on the statute of limitations because they’ve done certain things. Sometimes they didn’t even know they did things to extend the statute.

So once we see the transcripts, once we take a look at it, there’s not too many things we can say black and white, true and false, but those will give us the actual answer.

Jeffrey: One thing that you mentioned, very quickly, you said the IRS files a return for you. The technical term is called substitute for return. The IRS will prepare a return for you if you haven’t filed, based on information they received — 1099s, W-2s. Let’s talk about these SFRs. What does the IRS do with these SFRs?

Steven: Yeah, what happens is the IRS receives information, and a lot of times if the person doesn’t file a return and all the IRS has is W-2 information, they’re an employee, they had taxes withheld, the computer looks at it and says, “They may not owe us any money.” But if you’re an independent contractor . . .

Jeffrey: But they won’t give you back your refund if . . .

Steven: Well, that’s true. And they won’t return that

Jeffrey: They won’t return that.

Steven: I’ve never seen them prepare a return and send back money. That could happen, but I don’t think it’ll ever happen.

If there’s a big 1099, if someone sells stocks, if someone sells property, there may not be a whole lot of taxable income there, but if you don’t file a return, for instance for stocks, we see this happen all the time, a day trader, or someone who just sold stocks during the year. Maybe they sold $100,000 in stocks. Well, maybe they lost money. If they file a return and they show the IRS, “I lost money,” or “I didn’t make so much,” that’s fine. But if you don’t tell the IRS, they’ll file the return for you, and if they see $100,000 in stock sales, they’ll say, “Well, bought it for zero, sold it for $100,000. You owe us a lot of tax.”

Jeffrey: Because they don’t know what the cost basis is.

Steven: They don’t know. And we’ve seen that, the numbers in the millions. I always feel good. We file correct returns, the IRS will adjust it, and they don’t owe any money, and I always think, “The IRS said we owed millions, and when I got done with them, they owe nothing.” Well the fact is, we just filed correct returns, and they really didn’t owe any money. We can always do that, and we have a very, very high success rate with the IRS accepting correct returns.

Jeffrey: And when you said about millions, and that’s a big thing. I have a lot of clients that may have 22 pages of these 1099-Bs, which are called the broker statements, but they only took maybe $50,000 in actual cash, and they just kept buying, selling, buying, selling, and all of a sudden, when you add up all the gross proceeds, it came out to, like, $1.5 million, and they had losses, so you didn’t have to pay any taxes on them.

Steven: I have this a lot from around the world. It’s funny. I get people that were here in the United States, and they move out of the country, and they didn’t file returns because they thought, “Well, I didn’t make any money,” stock transactions, for instance. They don’t file returns. They don’t even know the IRS is filing returns, because they’ve left the country, and all of a sudden I’ll get a call.

I had one case a couple of years ago. The guy was in Brazil. He flew into Miami to see me. The IRS had just grabbed $3 million out of his brokerage account, and they still wanted another $2 million from stock sales. When we filed the returns, he actually had a loss. We got him all of his money back, but he actually lost money that year.

Jeffrey: And one thing people have to understand, SFRs, these substitute for returns, are usually filed anywhere from two to six years after the return is actually due, so that’s when the 10-year statute starts. It could be starting 16 years later.

In the last minute or so that we have, tell us how people can get in contact with you if they have any real IRS problems.

Steven: All right, yeah. I’m in south Florida. Most of my practice is limited to Florida. I do practice around the country, but most of it’s Florida. Most of it’s in the south Florida area — Dade, Broward, Palm Beach County. My telephone number is 305-682-1118. The website is FloridaTaxSolvers.com, FloridaTaxSolvers, and the email is help@www.floridataxsolvers.com.

I always give people free consultations. I like to meet folks in person. I don’t like to be like those TV ads where you call and you talk to some mystery salesman. They come in and see me. If they can’t, we talk on the phone. The consultation is always free. Put them in the right direction. If it’s a good match, if we can work together, we do it and solve a lot of problems.

Jeffrey: And Steve, as an attorney, also can represent you in court. We’re an enrolled agent. I must say, I can represent you up through tax court, but Steve can take it to the next level, and Steve also teaches, so he’s an expert in this field.

So we’d like to thank you. We’d like to have you back again, because there’s a lot more topics on this issue.

My name is Jeffrey Schneider. I am an enrolled agent, and this is We Got Your Back…Taxes.