Question regarding error on prior year(s) returns

"AlPastor" wrote:

First, I would strongly suggest that you seek professional help with this. I suspect that there is more to this than you have told -- possibly more than you know! Underreporting income to the extent you indicate cannot escape IRS matching procedures. IRS would have detected the difference between the amounts reported by Fidelity and others and the income on your mother's return. As a result, they almost certainly have been sending notices to her. At first, these notices would say they proposed to assess additional tax, for the underreported income. Later, they would actually assess this tax and the notices would become demands for payment. You need to find out what IRS has done in this regard. IRS has authority to waive penalties but not interest. The code actually says that penalties apply to late payment of taxes "without reasonable cause." After all penalties have been assessed (IRS can't abate unassessed penalties) a concise statement of your mother's condition, supported by a doctor's statement, should get some action from IRS. Although I highly recommend professional help, my experience, over many years, has been that a personal statement may be more effective than one written by a tax professional. Getting the information on IRS actions is vital. When you file your amended returns, you want to be sure that the data you use corresponds to the IRS files. It may be easier to have a professional represent you in this process. Frequently, the professional can accomplish the results more efficiently (because he/she knows the rules, etc.) without the emotions of dealing with IRS yourself. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

It is very possible that the IRS will abate the penalties, but they will not abate any interest. Just file the 1040Xs for the former years and wait for a letter stating the penalties and interest. Then write a letter and send it to the address on the form along with a copy of the form (keep one for yourself) stating your mother's condition and when it started and that you are trying to straighten things out. Don't forget about the state if your state has income tax. Keep a copy of all corrospondence with any tax agency, along with dates received and replied. Don't forget to take the federal excise tax credit (thanks Harlan) on line 71 of the form 1040 for 2006. Missy Doyle

I think you have a reasonable chance of getting penalties abated but not very likely to get interest abated.

It is possible that the IRS may waive the penalties; the interest they generally cannot do anything about. However, given that your mother is in apparently irreversible failing health, it may be possible to get a compromise agreement with the IRS under which your mother pays until it makes her squeak, but no permanent harm is done, and any remaining balance may be foregone in the interests of fair tax administration. Please don't get me wrong, it will not be easy to get the IRS to settle for less than the full amount owed, plus interest. As I said above, there is a better chance that the penalties will be waived, depending on the degree to which you can prove through objective evidence (think lots of Dr.'s examinations and reports) that she was sufficiently mentally impaired that she could not reasonably be expected to accurately comply with her tax reporting obligations. Unless you are a tax attorney, or a CPA with experience negotiating with the IRS, I would strongly suggest that you retain someone who is.