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Posted by L K Williams on February 7, 2007, 8:07 pm
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> My mother was diagnosed with dementia two years ago and I
> hold Power of Attorney for her. Last tax year was the first
> year my family realized she was incapable of handling her
> own finances including taxes. So, the best I could, I
> gathered all her documentation and took it to the tax person
> she'd started using a year prior. I was very unimpressed
> with this person and so decided that beginning with tax year
> 2006 I would prepare her taxes (using TurboTax which I've
> used for my own taxes for 10+ years). Also, for all of last
> year I had my mother put any and all mail in a box which I
> went through every week, saving all tax related items. The
> result being that I believe I have all tax documents this
> year.
>
> I did my mom's taxes and discovered that she underpaid her
> 2006 estimated taxes by approx. $1700. This cause me to
> research why this occurred and I discovered that she did not
> report income from one of her accounts (Fidelity) which
> caused the 2006 estimate to be wrong. Further number
> crunching determined that she did not report the Fidelity
> income for 2005 and under reported her income for 2005 by $6
> - 7K (I still need to review 2004 and prior but my mom
> doesn't remember where she put her tax records so it will
> take time).
>
> I am filing her 2006 taxes, paying the $1700 and penalty. I
> am calculating her 2007 estimated taxes correctly. My
> question is what to do about the prior year(s) returns that
> under reported her income? I know I need to file amended
> returns but I am very worried about the interest and
> penalties that the IRS is going to impose. My mother is not
> wealthy and has just enough to live on with her current
> assets. Is it possible the IRS will waive the penalties and
> interest and just allow my mother to pay the amount she owes
> due to her condition (it has been determined that she
> actually was suffering from dementia since 2003 but hiding
> it before my family realized there was a serious problem).
> No attempt was made to purposely under report the income and
> I want to correct any errors.
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
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