Expert: Richard Stolp - 8/14/2010

Question
Closed my psychiatric practice in debt (put money into an unfinished
& unused record keeping software project) but got sick before it could
be put into use.
Also a bookkeeper turned out to be incompetent showing far less
expenses and much more of a net income than I actually had for
2009. I painfully pieced together everything I could from checks and
other sources.
I could be ok for 2009, but if they audit 08 &07 I will be in terrible
shape because of missing records. Iwas able to go to the bank and
people I paid in 09 for info --08 & 07 are to far to get much info from
such sources---I will be going into an audit if it happens
defenseless.--no evidence for a great portion of my expenses. I live
on a decent state retirement about 5400/month and my wife and
bring in  social security about 2400/month all before taxes. We have
an old house that requires a lot of expense in upkeep. Having claimed
so much expense for the software writer who also did my on going
tech work and having to do two corrections to to his 1099 misc rather
slopilly i fear I could be a target.
I have carry over expenses from 08 & 07 where I have far less in the
way of records than 09. These make those prior tax years likely
targets.
the three years of little evidence for my expenses especially those
prior two have worried sick.
I made little money but without evidence of offsetting expenses I
could be looking at 60k or more of back taxes and have almost no
savings.
If it were only me my mind could stand the prospect--but it is my
wife who had nothing to do the practice that I fear for. We always file
jointly.
You mentioned offers in compromise but----. Please give me your
input--I think my return is atypical looking and a real target.-- My
wife lives for her music,painting and photography as i did for
psychotherapy. I foolishly assumed that my bookkeeper was keeping
records together.
Awaiting some ideas for responses for what seems likely to be in
store.
Appreciatively
Jack and Nancy

Answer
1. It doesn't sound like you have received any notices on your 2007 and 2008 returns. Assuming you got them in on time - the IRS usually processes returns relatively quickly. So, if you haven't had any notification from the IRS on those two years you may be OK. You also say you made little money those years - the IRS won't spend a lot of time with small offenders.

2. If you are audited for those two years (or any year# you will have to make a best effort to provide whatever detail they ask for. You may have already developed a log of all your expenses even if you don't have all the receipts. Usually the first sign of an audit is a computer generated notice that you owe back taxes - I assume that has not happened. If you do get one I would provide #if you can) only what the letter asks for. Do not "over provide" information.

3. If you do wind up owing over $25000 your payments will be based on your ability to pay. Since the balance due would be from a joint return both of you would share responsibility for the debt - your income would be pooled to arrive at the payment amount. You would have to provide the IRS with a financial review that shows all your expenses - anything left over would be applied against your back taxes.

4. You mentioned an "offer in compromise" - since this is our first conversation I assume you have been talking with others about your plight. IF you owe AND are living on a fixed income AND have no prospect of increased earning power then you MAY qualify - you'll know when you fill out the financial review (you can do most of that over the phone - ask the representative if they think you might qualify). Those ads you see on TV are the one percent of people that get their debts reduced due to their inability to pay. IF it comes to that - do it yourself - don't pay $2000 to 4000 to have someone else do it.

5. Remember the IRS will not ask you to make payments if you cannot afford them. Be sure to comply with any requests you get from the IRS in a timely fashion - so they don't try and collect the debt on their own though levies.