IRS Filing Question!

[SavingBucks]

My 30 year old DS is finally starting to grow up. He went back to school after years of party time, and is set to graduate with a BS in Business Management next May. He is also planning to apply to the MBA program at his school. He was fortunate to have most of his tuition paid for by Pell and Cal Grants. I will assist with the MBA. He is working 20 hours a week at about $16 per hour which is a poverty wage in LA. But the frugal gene has kicked in, and he is doing fine....

Well, back in the party time era, it turns out that DS did not file his income taxes for one year (about 5 years ago). He told me about this today, and I asked him why. He worked at a restaurant/bar in LA in the bakery portion of the business. He stated that the business classified him as a bartender instead, so his W-2 for that year reflected $20,000 in tips (that he did not receive)! This was at the time when it became a mandate to list tips on the W-2s. He said there was a tip jar but that went to the bartenders. I am assuming that he did have the proper amount of tax withheld for the regular wages since he tends to get monies back (income that year probably between $20 and $24K). There is NO way there would be enough withheld for an additional $20K. So, there is also a possibility of penalties and interest. This could haunt him for the future. So he stuck his head in the sand......Sigh............ I told to him find the W-2 and send me a picture of it.

So here are the questions:
1. There is a non-filing fee, but that is cheap around $125 if I recall..
2. Is there a way for him to dispute this old W-2? If so, is this with the restaurant management? The same management is probably not there. Or can he dispute it with the IRS/State of CA when he files the returns for Fed and State?
3. How would be go about filing this old return? Contacting the IRS? I may have that year of Turbo Tax on another PC, but unsure.

Can Legal Aid assist him?

Any advice would be appreciated. I am hoping he will address this issue in December as soon as he finishes the semester.

Thanks in advance!

[kork13]

In almost all cases, the best way to fix IRS issues is to bring it to them ... if the IRS catches it first, there's alot more trouble involved, like disputing & disproving what the IRS believes you owe, which shockingly () is always on the high side. That said, he's going to need/want to review all of his filings for the last 5 years to make sure that everything since has been up to snuff, because if he were to be audited, they could very well look closely at the following years as well.

The biggest issue to note is that the time involved matters a great deal... Exactly what year did he not file for? Although there are some exceptions, the practical 'statute of limitations' on IRS audits is 6 years back. So one option is to roll the dice & hope that nothing comes of it. However, be aware that technically, in the case of unfiled taxes (vs. unpaid/underpaid taxes or under-reported income), the IRS can go back indefinitely. That becomes less and less likely as time moves on (most audits occur within 3 years), but the potential is technically still there.

What would I do? Deal with it. I'd rather not cross my fingers and hope for inaction by the IRS, then always be looking over my shoulder come tax time. I'd find a good CPA, and discuss the situation with them. Depending on what the CPA says, you might sit down with a tax attorney as well.

But whether you choose to ignore it & hope for the best, or face it head on and resolve the issue, the very LAST thing I'd suggest is trying to fix this on your own with Turbo Tax or some other personal tax software. In these circumstances, paying for professional assistance is 100% needful. If you try to go back and file 5+ years late, you're inviting a world of hurt (scrutiny) from the IRS, and you want/need a pro in your corner to make sure that everything is done exactly right.
If she's around, MonkeyMama will probably have some of the best advice that you'll get here on these forums -- she's a CPA in California, and often offers excellent tax advice.

[MonkeyMama]

Honestly, no idea. Not my type of experience (non-filing). There are ways to fix/dispute these things, but usually you have to fix on the employer end (get them to fix it) and that gets harder as time passes.

My very uneducated opinion on this matter is to not worry about it. If you haven't heard from IRS in 5 years it will most likely not come up. Or I'd maybe file a tax return, report exactly what the W-2 said, and then take a deduction for the "fake" tips. Then in the extreme unlikely chance it comes up in an audit, at least you can defend yourself and explain the situation. I probably like that idea more than the ignoring it entirely. But in either case, I've never done either of these things.

It's very common to get incorrect 1099s and we do often just adjust those on the tax return. What comes up a lot is we know the 1099 was meant for a related tax entity, and we just subtract it on the "other income" line and show which entity it actually went to (and where the taxes were reported). Which is why I mention taking some deduction somewhere. Not quite as easy with a W2. Not entirely sure where I'd adjust it. You'd want to do it somewhere it would not generate a red flag.

[MonkeyMama]

If she's around, MonkeyMama will probably have some of the best advice that you'll get here on these forums -- she's a CPA in California, and often offers excellent tax advice.

Aw, Thanks. The advice that I generally offer is to not take tax advice from the internet.

I just wanted to throw in that I am leaving the tax field, so not sure how useful I will be on this front in the future. I was in my tax position during massive tax law changes, but where most of that has been left off with is the government saying, "Will iron out the infinite details later." To some completely ridiculous degree that makes my job completely impossible (more than usual). Is not the motivation for my career shift but is definitely a factor. Seems like a good time to exit.

[Like2Plan]

I agree with the previous advice to go see a professional at this point.

I did a google on the subject and found this on the IRS web site: “However, you do not need to report tips allocated to you by your employer on your federal income tax return if you have adequate records to show that you received less tips in the year than the allocated amount.”
Link: https://www.irs.gov/businesses/small...-and-reporting

I have no idea as to how this is reported on the tax form— just seems to me that maybe this situation isn’t as unusual as you might have feared. The late filing does complicate things and you really want to get this right— Now might be a really good time to get this fixed as it isn’t in the busy tax season.

You might look for an Enrolled Agent in your area to help.

[SavingBucks]

Thank you so much for the advice. I will discuss the issue with my son so he can decide what to do in this case. I don't think he kept records on tips. But a tip jar at the bakery area does not add up to much, especially when split with staff. Thank you again! (I did try to post the other day, but it disappeared).