Everyone has to file taxes, Harvard Law professors included

Most Americans don't enjoy filing or paying, but they do it anyway, and they pay up. If they can't pay, they get in line and start paying the IRS in installments. Some people are late, and some seem to fall off the grid, with many years of failures. But the IRS usually catches up. At that point, taxes, interest and penalties can be crushing, and it can even mean jail in some cases. Once you fall behind, in filing returns, payments, or both, it can be tough to face the financial and other impediments to getting back on track. And it can seem like the IRS rules are stacked against you -- the IRS files returns for you if don't do it yourself.

That's right, everyone has to file tax returns annually, even Harvard Law School professors. And as we will see, if you don't fill out the tax returns yourself, you can end up much worse off, even if the government doesn't try to subject you to criminal penalties. Not filing was one of the problems facing Harvard Law professor and former Winthrop House faculty dean Ronald S. Sullivan, Jr. He is the same Harvard Law professor who lost a Harvard deanship over representing Harvey Weinstein in his criminal case.

The professor failed to file tax returns with the IRS for many years, and then he went to Tax Court to dispute the taxes with the IRS. In Sullivan v. Commissioner, the United States Tax Court held for the IRS. In some ways, the professor handed the IRS an easy victory. The Tax Court already has a reputation for being very pro IRS, and more likely to rubber stamp the IRS claims than claims by the taxpayer. But how a case is handled, both before the Tax Court and during it, are really important.

When this case was just with the IRS, the professor failed to respond to many notices, and with the IRS, procedure is extremely important. That was one of the reasons he lost big. IRS records showed that Sullivan failed to file tax returns from 2005 to 2013. Eventually, the IRS caught up with him and was trying to collect an outstanding tax balance from 2012 and 2013. The amount due for just those two years was $1,231,775.

Did Sullivan file tax returns for those years? No, and Sullivan disputed that he owed it, saying "I did not (nor have I ever made) enough money to justify a $1.2M tax." Sure, that sounds like some kind of equitable argument, but he seemed to be short on proof that he made less. He just claimed his real income was far less than the IRS said it was.

This is one of the key lessons of the case. He had not filed these returns, so the IRS pieced his income together based on records, such as Forms W-2 and 1099. The IRS can do this, preparing what the IRS calls "substitutes for returns" or SFRs. That was what the IRS did for 2012 and 2013.

As you might expect, when the IRS does this, it usually does not work in your favor. In fact, that is a big understatement. The IRS usually has only some reports that attribute income. For example, if the IRS knows you got a $1M lawsuit recovery, the IRS won't know if some of that could be deducted for attorney fees.

Similarly, if you sell a house and received sales proceeds of $1M, the IRS will not know what your basis was in the house. The IRS will also not know whether you might qualify for the up to $500,000 exclusion for sale of a principal residence. You have to claim that -- on your tax return.

Usually if you file yourself you will owe less, possibly much less. Here, after the IRS prepared these substitutes, the IRS started trying hard to collect. Once again, Sullivan did not follow IRS procedures. Eventually, though, when the IRS issued a Notice of Intent to Levy, Sullivan tried to object. Sullivan failed to respond to multiple requests that he provide evidence that the IRS incorrectly assessed his taxes, and the Tax Court easily ruled for the IRS, saying it was entitled to collect.

Over the course of 2017, the IRS sent Sullivan three letters informing him he would need to file his 2012, 2013, 2014 and 2015 returns in order to contest the amount he was required to pay. At one point, the assigned IRS settlement officer scheduled a date for a telephone hearing; Sullivan did not call in, nor did he provide financial documents, or tax returns. The IRS tried to prompt Sullivan at least seven times about his outstanding balance.

The Tax Court agreed that the IRS had followed the rules. Did the professor? Not so much. The Tax Court agreed that at this late date, the professor had missed his numerous chances to improve his tax picture. The Tax Court said the amount of tax was fixed, and that the IRS could collect.

Of course, Sullivan might well have been right that his proper taxes for 2012 and 2013 should actually have been much less. But he lost the chance to prove it. Filing tax returns is key, even if you can't pay. And once you start to receive notices, responding on a timely basis and keeping your procedural rights alive is important too. That could have made all the difference.