Today TaxMama hears from Kris in the TaxQuips Forum, with this concern. “A taxpayer hasn’t filed since 2002. He is self employed, but cannot get all records, namely amount of income and bank statements that far back. I can prove income from 2004 through 2009, along with expenses. What do you think I should do about 2003? He does want to get right with God and IRS. He will stay compliant from here on out.”
Here’s what you do. This is one of my favorite challenges.
1) You have a POA. Call the Hotline and request third party reports for 2003-04.
2) Use that information as a starting point, as you have done.
3) If it doesn’t show enough income, prepare a schedule showing his cost of living during those two years. You can even use the IRS collections standards pages to build that schedule. http://www.irs.gov/individuals/article/0,,id=96543,00.html
4) If he wasn’t paying rent (i.e. living with family) or didn’t have certain usual expenses, spell out why in your notes.
5) Based on this, adding in some money for entertainment and personal stuff, create his income.
6) If he was in business, gross up the income to take into account routine business expenses (not including M&E or anything that might be thrown out in audit)
Help him get complaint the way he wants to AND close 2003 against ever being audited. He’ll be at peace.
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