Jim Monaghan has a cautionary tale for millions of Americans who take seriously IRS advice to toss out old tax records. He was once like you and he’s lived to regret it.
Back in the early 1980s, he was living in New Jersey and working as a salesman for a big company. He even had a tax accountant, who helped prepare his annual returns, he says. But, in 1990, a business that he had started with a partner a few years earlier failed, and he decided to move to California to get a new start.
That’s when he made what he now considers to be a pivotal mistake. He had a box full of old tax records that he figured he no longer needed. After all, he’d never had a tax problem, he says. And the Internal Revenue Service states clearly in all its taxpayer booklets that you can throw away old tax returns and records three years after filing a return. He tossed them, filed a change of address card with the post office and left.
Things were rocky for a while after the move, he acknowledges. The country was in recession and he had trouble finding a job. He lived with friends for two years. Eventually, he found work with a temporary service agency.
Four years later, in 1996, he received word that the IRS was levying his wages for a back tax bill. The tax Monaghan allegedly owed amounted to more than $56,000, mainly because of penalties and interest on the debt that dated to 1984, according to the IRS.
Monaghan, who now lives in Costa Mesa, Calif., thought there must be a mistake. He lived in New Jersey for five years after that 1984 return was due. If there was a problem, why wouldn’t the IRS have contacted him years ago? The response: The IRS did try to reach him in 1991, but the letters the agency sent were returned, apparently because they were sent more than a year after Monaghan moved. (The Post Office generally keeps change of address cards on file for just six months.)
Isn’t there a statute of limitations? Isn’t the IRS bound to contact you within three years if they have a question on a return, the same three-year period for which you’re supposed to keep records? Absolutely. But, here’s the rub: The IRS says it never received Monaghan’s tax return.
If you don’t file a tax return, there is no statute of limitations. The IRS can go after you for unpaid taxes from 1984, 1964 or 1934, if they want to.
If there was no return filed, how does the IRS know you owe taxes, you might ask? At some point, if the IRS does not have a tax return for an individual, they will create one, says Judith Golden, an IRS spokeswoman in Laguna Niguel, Calif.
A return is cobbled together using data showing your income and withholding from your employer, banks and investment companies. Employers, banks and brokerage firms have been required to send this income information to the IRS for years. The IRS then assumes that you are single, have no dependents and have no itemized deductions–the situations that would result in you owing the most tax. And, on that basis, they file a new tax return on your behalf, Golden says.
That’s apparently just what happened to Monaghan. The federal tax levy against him is based on a return that the IRS filed for him. In fact, the agency says it was missing and, thus, fabricated three returns–for the years 1984, 1985 and 1986. The IRS apparently has all the previous and later year returns.
The IRS says Monaghan can refile his mid-1980s returns with the accurate information, but Monaghan won’t for two reasons. First, he claims he’s already filed and the IRS simply lost his returns. He considers filing today an tacit admission that he agrees with the IRS claims, and that’s an admission he refuses to make.
Secondly, and perhaps more importantly, there is no way for him to file an accurate return some 13 years after the fact, he says. He was a salesman back then, with lots of itemized deductions at a time when itemized deductions were somewhat more valuable. He no longer has records of his deductible expenses, whether for mileage or for charity.
Meanwhile, an official in the IRS’ Problems Resolution office has recently been assigned to Monaghan’s case and is trying to reconstruct records from IRS archives to see whether the agency should let Monaghan off the hook. The agency will look at Monaghan’s filing history to make sure that he has a record of paying his tax in full and on time. If so, the IRS is likely to be more lenient, says Golden. If not, it’s Monaghan’s word against the IRS’.
Monaghan notes that IRS officials have been polite and pleasant through this whole ordeal, but they continue to tell him that he’s caught in a taxpayer’s Catch-22. If you file an accurate return, you need to keep your records for only three years. But if you toss them, and the IRS claims it never received your return, you somehow have to prove you filed. If it has been long enough, that’s nearly impossible to do without a copy of your return.
“They say you only need to keep records for three years. But that’s not true,” says Monaghan’s wife, Nancy. “For your whole lifetime, you have to be able to prove that you did file. You have to keep them forever.”
Indeed, even the IRS’ Golden says she tells friends to keep a copies of all their old tax returns. “This isn’t legal advice,” she cautions. “But it’s practical advice.”
