The only sure things in life are. . .

February 7, 2006 9:02 PM

Icky back taxes situation, what would you do (esp. if you know tax law well)?

A friend of mine worked for a company for approx 5 yrs believing his income was off the books, it ends up the company was claiming his income the entire time. It now ends up he owes roughly $20K. His wife found a tax attorney from TV and they are about to file an offer of compromise to knock off approx. $15K from the bill. The problem is, my friend says the attorneys overstated his monthly expenses by about $2K. He's afraid if the IRS really looks closely, they will get audited and the situation will worsen. The wife, who handles all the bills, just wants to get it in and move on.

My question is, how likely is it that the IRS will not accept this offer and is it a case where they would just say no and then have to come back w/ a new offer or would they be punished some how?

posted by lannanh to work & money (10 answers total)

If he already owes $20,000 and he's getting a "break" of $15,000, don't you think they're going to audit the return almost by default?

I am not a taxamatographer, but it seems like you're going to want to play it safe at this point. Why was the attorney overstating expenses?
posted by disillusioned at 9:13 PM on February 7, 2006

He believed his income was off the books? Yeah, he's living in a fantasy world.

Sure, he can offer the IRS a reduced settlement, and it's possible they'll take it, but there's a good chance he'll actually get audited.

He should pay what he owes and move on with his life, otherwise he'll have this hanging over his head for quite a while.
posted by bshort at 9:14 PM on February 7, 2006

If he has a reputable and honest tax attorney, a compromise isn't out of the question.

Problem is that if the attorney has to overstate expenses by $2k/month, he doesn't have a reputable and honest tax attorney. If he has a spare $2k/month, he should arrange a payment plan for $20k, and learn his lesson not to try to cheat the IRS like this. (How on earth could he think that the income was off the books? The only way the company could be declaring his income is if he gave them a W-9 or a W-4, and the company should have been issuing him 1099s or W-2s. If it wasn't, he may have legal rights against the company.)

Another reason to move on is to please his wife.

And a final reason to move on is that I wouldn't trust those attorneys not to be trying to create a futile fight that they then bill him thousands of dollars for. What state is he in? By the facts you give, it really sounds like the attorney is trying to rip him off.

If you're asking how likely he is to get away with a fraudulent offer of compromise, the answer is I don't know, but one doesn't want to be caught lying to the federal government. The consequences aren't pretty, and the attorney isn't going to be the one who gets blamed.
posted by commander_cool at 4:18 AM on February 8, 2006

Problem is that if the attorney has to overstate expenses by $2k/month, he doesn't have a reputable and honest tax attorney.

He said that the wife went to a company that advertises on TV. That by definition precludes the concept of a "reputable and honest tax attorney". The fields of taxes, estate planning, etc. is replete with charlatans.

The friend's problem is that he has dealt with crooks twice in a row now. He was complicit the first time, and he is facing criminal penalties if he does not make this right.

He needs to get a referral from a local bar association or a lawyer to a real tax attorney, one in his town, one that he can sit across the table from and get sound advice.
posted by megatherium at 4:32 AM on February 8, 2006

The IRS's penalties are much harsher when they suspect deliberate fraud, and much more lenient when they think you've made an honest-to-god mistake.

So far, he can probably present this as an honest mistake. (In fact, as commander_cool points out, it may be his employer's fault — in which case he should definitely take legal action against them.) He'll owe back taxes, plus an additional fine for failing to file, but he shouldn't go to jail.

If he turns around and lies about his expenses to the IRS... well, IANAL, but I think it might make them start to question his good intentions.
posted by nebulawindphone at 4:58 AM on February 8, 2006

The IRS's penalties are much harsher when they suspect deliberate fraud, and much more lenient when they think you've made an honest-to-god mistake. So far, he can probably present this as an honest mistake.

That seems really doubtful to me. I always thought that you're supposed to pay income tax regardless of whether or not your income is "on the books"; so it really sounds to me like the guy was out-and-out defrauding the IRS.
posted by Johnny Assay at 6:33 AM on February 8, 2006

I suspect that the monthly expenses were part of a proposed payment plan. The rationale would be something like this: your friend earns x, and has monthly expenses of y, so he can only afford to pay the IRS $5000.

This information was probably supplied on Form 656 and your friend probably signed the form "under penalties of perjury."

He should correct this "error" as soon as possible. If the IRS were to accept this offer, it would never be binding on the Service as it was based on fraudulent information. They could come back seeking additional tax, interest and penalties at any time.
posted by probablysteve at 10:15 AM on February 8, 2006

The IRS WILL scrutinize every figure they're given, and they are not people to piss off any more than your friend already has. He might get away with it, but if he doesn't, it won't be pretty.

Offers of compromise can and do get rejected all the time.
posted by moira at 10:35 AM on February 8, 2006

So far, he can probably present this as an honest mistake.

Nope. The writer said that his "friend" worked for five years "thinking his income was off the books". Meaning that he was being paid, but thought that the company would not report the payments to the IRS. Thus he too decided that he would not report the income. That is a major felony with multiple counts, and it portends a disastrous result unless he comes clean and does so with good professional advice. And even then his fate depends on the good graces of the enforcement people at IRS and the local U.S. Attorney.

This is serious shit.
posted by megatherium at 7:31 PM on February 8, 2006 [1 favorite]

The bad news is that paying the tax does not preclude a later federal prosecution for tax fraud.

The figures involved were higher, but I know an attorney who ended up in the federal pen for 27 months because of an "off the books" tax situation.

Your friend needs a real attorney. Now.
posted by dhartung at 11:15 PM on February 8, 2006