Employee Must File Overdue Tax Returns Immediately

Recently, one of my valued employees admitted to me that she and her husband have not filed income-tax returns for several years. Since she is a valuable employee, I would like to see what I could do to keep her from going to jail. What are her options?

Apr 1st, 1996

Charles Blair, DDS and

John McGill, MBA, CPA, JD

Question:

Recently, one of my valued employees admitted to me that she and her husband have not filed income-tax returns for several years. Since she is a valuable employee, I would like to see what I could do to keep her from going to jail. What are her options?

Answer:

Most people do not understand that there is no statute of limitations on failure to file a return. The statute of limitations begins to run only after the return is filed. In addition, the IRS says that an individual is subject to penalties for failure to file, even when he or she would otherwise be entitled to a refund had the return been filed.

For these reasons, it is important that your employee file these tax returns as soon as possible. In general, the IRS is more lenient, and may waive fraud penalties, when taxpayers voluntarily come forward and file overdue tax returns before the IRS catches up with them.

In order to file the necessary returns, your employee will have to get the proper forms for the years involved and, also, all of the information necessary to complete the returns. Her best bet is to go to a tax attorney or CPA for help in getting these forms and completing them. It might be necessary to ask past employers and financial institutions for copies of old W-2s, 1099s and other information returns. She also should consider asking the IRS to obtain the data from its computer records if the attorney or CPA approaches your local IRS office for help. You also should make sure that state income- tax returns are filed as well, since these tax agencies are now sharing information so that a filing with one agency will trigger a request from the other for the past-due tax returns.

Your employee should be encouraged to file the returns, even if the information on them is not totally complete, but is only complete to the best of her knowledge. In addition, returns should be filed even if the employee and her husband do not have the funds to pay all of the back taxes, interest and penalties otherwise due. Filing the returns may help avoid criminal prosecution, and the IRS may be willing to accept an offer in compromise for less than the full amount of taxes, interest and penalties due, if the employee can show that she and her husband do not have the financial resources to pay what`s owed in full.

Question:

For two years now, I have been an associate in a general dental practice. My employer has agreed to pay me 35 percent of the total collections I generate, but I am responsible for all of my fringe benefits including health insurance, disability insurance, auto expense, etc. Since I am considered an employee of the practice, will these amounts qualify as deductible employee business expenses on my personal tax return?

Answer:

The payment of medical insurance and disability insurance premiums by you personally does not qualify as an employee business expenses. Rather, the personally-paid health-insurance premiums may qualify as a personal deduction of Schedule A of Form 1040, but only to the extent that the total of health- insurance premiums paid, together with all other medical expenses, exceed 7.5 percent of your adjusted gross income.

Allow us to suggest a more efficient manner of handling these expenses to both you and your employer. If your employer were to pay your health- insurance premiums and disability-insurance premiums directly and reimburse you for your automobile expenses at the IRS-approved rate of 31 cents a mile, the result would be mutually beneficial. As long as these payments were included as part of your 35 percent total-compensation package, there would be no additional cost to the employer. In fact, the employer would save, since no payroll taxes or retirement-plan contributions are due on fringe benefits paid for an employee, in lieu of taxable compensation.

From your standpoint, having the employer pay for these items and simply taking reduced, taxable compensation would save you federal and state income taxes, as well as payroll taxes. As you can see, approaching your employer with this novel approach can create a win-win situation.

Question:

Several years ago, my wife and I invested some of our IRA money in some real estate limited partnerships. In 1995, after filing our 1994 tax return, we were informed that the partnerships were bankrupt and that we had lost all of our $50,000 investment. How can we deduct this loss?

Answer:

A loss from an IRA or other retirement plan is deductible only after the entire account has been distributed, and then only to the extent that the distributions were less than your basis in the IRA.

The problem lies in computing your basis in the IRAs. If you made only deductible contributions into the IRA, you have no basis in the IRA, and therefore cannot deduct any loss. However, if you made after-tax, nondeductible contributions to the IRA, you have basis in the IRA account equal to the contributions made. If you have maintained a record of these nondeductible contributions, you would be entitled to a loss deduction once the IRA account is distributed.

If there are no funds remaining in this IRA, there would be no penalty for closing out the account at this time, so that the loss, if any, would be currently deductible. Otherwise, if the IRA account remains open, a loss could not be deducted until after the IRA account has been closed. For further information, see IRS Notice 1987-16, 1987-1 C.B. 446, as clarified by Notice 89-25, 1989-1 C.B. 662 and Revenue Ruling 80-268, 1980-2 C.B. 141.

Question:

During 1995, I separated from my spouse and we are still on the "outs." Can I decide independently to file "married filing separately" without getting her to agree to this?

Answer:

Yes. Sometimes a relationship between separated spouses is so bad that one spouse does not want to file jointly with the other, even though their total tax liability would be lower. One reason for this is that a joint return creates a joint liability for all the tax regardless of which spouse generated the income. Where a lack of trust exists, separate returns may be necessary.

Dr. Blair is a nationally-known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 CharlottePark Drive, Suite 230, Charlotte, NC 28217, phone (704) 523-5882.

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