Next up in our series of gruesome and haunting tales of how things can go horribly wrong with your clients, a chilling example of why you should ensure your clients’ tax returns really do get filed.
A client, let’s call him Andrew Smith, came to our office shortly after he moved to New Mexico from Pennsylvania. Back in Pennsylvania, he had sold his 200-acre farm, split into several parcels, for a total of about $1 million.
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Two parcels of his land had been sold on real estate contracts. He claimed his prior year’s tax return was hidden away in some box, or maybe lost in the move. He also said he’d get it to us when he found it. In looking back, was the first of a series of red flags we ignored.
We collected his documents — which were of the shoe box and handwritten list variety — and I prepared his return. At his request, we gave him paper copies of his Federal, New Mexico and Pennsylvania tax returns for him to mail himself. Another red flag, but back then, lots of clients at that firm still paper-filed their returns.
Andrew returned for the next six years, with more boxes of documents and lists of income and expenses. Since two of his parcels of Pennsylvania farmland had been sold on real estate contracts, he still had Pennsylvania source income.
In New Mexico, he invested nearly all of his cash into more land, which he developed and then sold on yet more real estate contracts. Preparing his tax returns was always a pretty major project with all the moving pieces in his life.
Andrew always requested paper copies of his tax returns to file himself. He paid our bills without complaint and was generally pleasant to work with, even if his data was a challenge to pull together.
A small red flag was that he never paid any of the estimated taxes that we gave him vouchers for. It also didn’t seem like he was paying the taxes due on his New Mexico or Pennsylvania returns.
As I came in to work one morning, our receptionist alerted me that an IRS revenue agent was waiting in the conference room to meet with myself and our firm’s tax manager. Puzzled, we greeted the agent and asked what we could do for her.
"I came to your office today because you have a POA on file for Andrew Smith," the agent said. "He hasn’t filed a tax return in 10 years and by our calculations, he owes $254,000 in income tax, penalties and interest."
We were stunned. We had always assumed he mailed in those copies of his tax returns. We had no idea that he was only getting his tax returns prepared to show to his bankers.
It got worse…
It turned out that Andrew had done this before. Several years earlier, he came to our office and had taken out a loan to pay the IRS over $100,000 in taxes for 10 years’ worth of unpaid taxes.
The IRS agent gladly shared all those records with us and told us that our next step was to get those missing tax returns to her as soon as possible.
When we confronted Andrew with his tax problems, he went into an incoherent rant about illegal taxation and government interference. Nonetheless, he did cooperate with us and we managed to get all of the missing tax returns to the agent in a few weeks. We also re-prepared four hand-written and error-filled returns, which came to us via the attorney in Pennsylvania who had represented him the first time he didn’t file tax returns for a decade.
With the actual tax returns now on file, Andrew’s bill to the IRS dropped to about $100,000. I reconciled the IRS calculations to ours to make sure the liability was correct, but Andrew didn’t have any cash to pay the IRS.
This was sometime in 2009, so the crash of the real estate market meant that he couldn’t find buyers for his land. And he’d had to repossess some of the land he’d sold when buyers quit making payments on their real estate contracts. With his money tied up in unsold land and little cash flow, his choices were (as you can guess) getting an Offer in Compromise or letting the IRS seize his property.
The next step was to provide the IRS agent with a completed Form 433-A with all of his income, assets and liabilities. Andrew refused to cooperate and wouldn’t return any of our phone calls.
The next time we heard his name, it was via one of those 1-800 Get Tax Help Now companies that you see on late night TV. It seemed he had engaged them to finish up his case with the IRS and had transferred his POA to those people.
We got a call from them to see if we’d be willing to take a look at his 433-A when they got it completed to make sure they didn’t miss anything. Sure, we said, we’ll take a look when you get it done. We never heard back from the 1-800 Get Tax Help people, so I have no idea if they had any better luck extracting information from him.
Even though we had collected a deposit up front, he still owed us a couple thousand for the work we did with the IRS. Another red flag we should have paid attention to: anyone who’s unwilling to pay his taxes, might not want to pay all of his other bills, like ours.
We sent our collections attorney after him, but he had pulled up stakes and vanished. He did show up briefly in our office one day to ask for help as his Social Security was being garnished by the IRS. He’d made a deal with the IRS: if he got them his current tax return, they would remove the garnishment.
I agreed to help but stressed that before we do any work, he needed to pay us up front for the tax return, plus for the previous work that he still owed us for. I presented him with an invoice for $5,000.
He stormed out and I never saw him again. I have no idea what become of him, or if the IRS finally seized his land as they had threatened to do.
Here are a few lessons we learned the hard way:
- Always, always get a copy of the prior year’s return from new clients.
- File their returns for them if you can. Either efile them, or mail them yourself.
- Follow up and be persistent when it appears that a client isn’t paying their taxes in full.
- Get payment upfront for all IRS cases with significant dollars attached.
- Never work for free!
Tune in next week for The Tale of the Out of Control Controller.