In 1811, President James Madison started the Federal Conscience Fund, which allows guilt-ridden Americans to surreptitiously atone for their financial sins. Over the years, generous benefactors have achieved various levels of catharsis. Typical donors range from guilty individuals, such as a Massachusetts woman who mailed in nine cents, because she re-used three postage stamps, to a government contractor haunted by the ghosts of Christmas past who sent in some $400,000.
Predictably, many people send in offerings to clear their consciences “with the IRS and with God.” One anonymous woman generously offered a few hand-made quilts to settle her tax debt. But perhaps the best of all is a man who emptied his conscience by writing, “I cheated on my income taxes and haven’t been able to sleep. So, I enclose a cashier’s check for $1,000. If I still can’t sleep, I’ll send in the balance.”
Nevertheless, despite the advertisements that sometimes appear on late night TV, the IRS never accepts barter and hardly ever accepts partial payments. Although the statute of limitations has probably run on the quilt woman and the quasi-penitent insomniac, with the way the law is written, it’s hard to tell.
Mark Your Calendar
The IRS has three years after the April 15 due date to audit tax returns, unless. . .
Your friendly neighborhood auditor can politely, or not so politely, ask you to file Form 872, the voluntary consent to extend time to assess civil penalties. Some practitioners refer to this form as the “waive or walk” option, and I think we all know what that means. Pragmatically, if you refuse, the Service will probably wrap up the audit quickly and assess a few extra thousand dollars in fees just for good measure, and lots of luck convincing a federal judge that these add-ons are patently unreasonable or merely punitive.
The best practice is to make a deal; for example, agree to a limitations extension if the Service extends the time to file an amended return. Typically, these 872 extensions are good for 12 months each, although Form 872-A is an “open-ended extension” that expires after 90 days’ notice by either party.
The Big Kahunas
The general rule goes to six years if there is a “substantial understatement” of income, which is defined as omission of more than 25 percent of income. In January 2012, a sharply-divided Supreme Court tried to relax this rule when it decided U.S. v. Home Concrete & Supply, LLC. In an opinion by Justice Breyer, the Supremes held that overstating tax basis was not the same thing as understating income, so the three-year limitations applied. But Congress put the shteln on that by amending the tax code. That amendment applies to returns filed after July 31, 2015, as well as previously filed returns that remain open.
The six-year rule applies flat-out in Report of Foreign Bank and Financial Accounts (FBAR) matters, assuming that you omitted more than $5,000 of foreign income. If that last sentence caused you to mentally flip through the calendar and/or sent a subtle chill through your body, consider approaching the IRS via the Overseas Voluntary Disclosure Program. The OVDP is by no means a “get out of jail free” card, but it may help in terms of damage control.
As a brief add-on, just in case you missed it, the IRS recently changed the due date for FBAR forms from June 30 to April 15, effective next year. Additionally, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 changed certain due dates for some relevant partnership and corporation tax forms.
Finally, there is no statute of limitations for non-filers. That doomsday scenario may also apply to partial returns that omit one or more key supporting forms.
It is very satisfying to send the IRS a terse rejection letter which says something like “My client would be more than happy to turn over the requested records, but you’re a day late and a dollar short.” Maybe one of these days…