Handling Taxpayers Who Have Forgotten Their Filing Obligations

We often encounter clients who have not filed tax returns for many years, some of whom have received a notice from the IRS regarding their non-filing status. Many times, these clients don’t have the liquidity or even the assets to pay their delinquent tax obligations and end up applying for an Offer in Compromise (OIC).

Recently, the IRS form for submitting an OIC was modified in section 7 to add a question, which requires the taxpayer to certify that he has “filed all required tax returns” or to certify that the taxpayer “was not required to file a tax return” for a particular year.

In some cases, neither answer is correct. Does this mean that the taxpayer cannot file an OIC request without filing all of the delinquent returns? Apparently not, the IRS has been accepting OIC requests which do not check either box. The IRS has been accepting such offers if tax returns for the last six years have been filed. This is consistent with the revised domestic Voluntary Disclosure Practice, which requires 6 years of unfiled returns to be filed or amended. It is also consistent with the Internal Revenue Manual, which provides that requests for unfiled tax returns in an OIC will generally not exceed a 6 year look-back period, without managerial approval. IRM 5.8.4.8(6).  Practitioners should note that the certification in section 7 should not be answered incorrectly as it may make the submission of Form 656 fraudulent and subject the taxpayer to penalties for perjury.

Also, taxpayers and their advisors should be aware that if a taxpayer does not timely file a tax return that the liability for that return may not be dischargeable in bankruptcy even if a late return has been filed. McCoy v United States, 666 F.3d 924 (5th Cir. 2012), cert. denied, 133 S.Ct. 192 (2012).