If you have not filed your taxes and you have an obligation to file, then you must address the situation immediately. Although rare, the IRS may pursue criminal liability for the failure to file a federal tax return. Under Title 26 of the United States Code Section 7203, it is a misdemeanor to “willfully” fail to file a federal income tax return.
If convicted, you can be fined up to $25,000 ($100,000 in the case of a corporation), or imprisoned for up to 1 year. In order for the government to criminally prosecute a taxpayer under Section 7203, it must prove beyond a reasonable doubt:
- that you were required to file an income tax return;
- that you did not file a tax return at the time required by law; and
- that your failure to file was “willful”.
The federal government must prove all of the above elements for each tax year that you failed to file an income tax return for a conviction. The statute of limitations for the willful failure to file a tax return, excluding information returns (W-2, 1099, 1098 etc.), is six years. The six year period begins to run on the day each tax return is due. Practically speaking, unless there is a history of non-filing, although one unfiled return can trigger criminal tax exposure, most non-filer situations are civil.
In order for the IRS to take enforcement action, it must assess a tax. Congress gave the Internal Revenue Service the power to prepare a tax return in the event that one is not filed. To complete the tax return, the IRS will utilize third-party reporting documents, begin a formal investigation, or assemble a tax return based on prior tax returns.
Before the IRS prepares a tax return, known as a Substitute for Return (SFR), the taxpayer is notified. Typically, the IRS sends a letter to the taxpayer’s last known address stating that its records indicate that the taxpayer did not file a return for a specific period. The IRS will require that the taxpayer respond, typically within 30 days, with either a signed and dated copy of the tax return or to indicate circumstances why a tax return is not required.
The failure to respond by the IRS’s deadline would result in the IRS issuing a proposed tax assessment. The IRS would issue its proposed tax assessment by sending the taxpayer a document called the Notice of Deficiency. The Notice of Deficiency, also known as the Ninety (90) Day Letter by its reference to petition the US Tax Court within 90 days, 150 for taxpayers living abroad, outlines the details of its adjustments and computations.
The Notice of Deficiency is the taxpayer’s last opportunity to contest the IRS’s assessment in the United States Tax Court. The taxpayer would exercise his right by filing a US Tax Court Petition. The failure to file a Tax Court Petition within 90 days of the date of the Notice of Deficiency would result in a tax assessment upon which the IRS can begin enforcement action (i.e. filing tax liens, levies, garnishments, seizures, etc.).
Generally speaking, an IRS prepared tax return is an inflated tax assessment. An SFR is an unfavorable tax return with no deductions, a zero cost-basis, and short-term holding rates. This results in the IRS sending a large tax bill. To make matters worse, the IRS assesses tax penalties based on the inflated tax assessment.
The most common penalties for an unfiled tax return is the failure to file and the failure to pay penalties. The penalty for the failure to file is imposed at 0.5% per month, to a maximum of 25%. The penalty for the failure to pay is imposed at 0.5% per month, to a maximum of 25%. The failure to pay penalty increases to 1% per month if the taxpayer does not pay within 10 days of a notice of intent to levy. If the IRS concludes that the failure to file the return was fraudulent, it assesses an enhanced penalty of 75% based on the tax due.
Additionally, the IRS will assess statutory interest which accrues on both the tax owed and tax penalties. The IRS publishes its interest rate every quarter which is the federal short–term interest rate plus 3 percent compounded daily. The 2013 first quarter rates are 3%.
If you have years of unfiled tax returns, you must act now. Todd S. Unger, Esq. is a tax attorney who can help you respond to an IRS investigation, guide you on which tax returns to file and which tax assessments to contest, help gather relevant financial documentation, and analyze whether to file a US Tax Court Petition or deal with the assessment administratively. Additionally, he can work to negotiate and arrange a tax resolution that works for you or your business. Contact the Law Offices of Todd S. Unger, Esq. today for a confidential consultation today. (877) 544-4743.
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