In today's society, many Florida taxpayers do not file their tax returns simply because they cannot pay their taxes. However, one of the most serious offenses an individual can commit, with respect to the IRS, is failure to file a tax return. Under Title 26 of the United States Code, Section 7203, it is a federal crime or offense for anyone to willfully fail to file a federal income tax return when required to do so by Internal Revenue laws or regulations. A person's willful failure to supply information or pay tax is also punishable as a crime under Section 7203. In some cases, a person convicted of these crimes may be imprisoned for up to 5 years.
In addition to the risk of criminal prosecution, there are severe civil penalties that are imposed for failure to file a tax return. For example, the failure to file penalty pursuant to Section 6651 is assed by the IRS at a rate of 5% per month or partial month up to a 25% maximum. The failure to pay penalty is assessed by the IRS at a rate of 0.5% per month or partial month up to a 25% minimum. If both the failure to file and failure to pay penalties are assessed, the failure penalty is reduced by the failure to pay penalty. Hence, penalties are greater when a taxpayer fails to file versus when a taxpayer fails to pay.
Similarly, as mentioned above, there are serious underpayment penalties to taxpayers. One example would be criminal fraud, which is your basic example of tax evasion. This can result in imprisonment, fines, or both. Another example would be civil fraud, where the taxpayer fraud does not rise to the criminal fraud level. If this happens, the penalty can be up to 75% of the portion of tax underpayment which is directly linked to the determined fraud. Moreover, there are penalties for frivolous returns. A frivolous return is where the taxpayer omits or is incorrect with respect to information which is required to determine the taxpayer's tax liability. This can result in a penalty for $500 dollars for each and every frivolous return that is filed with the IRS. Furthermore, in the event a refund is owed to the taxpayer, this refund may be given up if not claimed in time (a specific example of this would be the earned income tax credit).
Moreover, interest on underpayments run from the due date of the tax return, i.e. April 15th of the given year. In other words, taxpayers can expect to pay a lot more than they owe to the IRS once interest accumulates. For example, the interest on unpaid balances is around 4% annual interest on unpaid balances. Interest is updated on a quarterly basis, so this number can fluctuate dramatically. Furthermore, the statute of limitations, criminal charges may be brought against you within six years of the date that the tax return needed to be paid. With respect to civil charges, there will be no deadlines for the statute of limitations purposes, but civil penalties may be imposed. Hence, the taxes you need to pay will be assessed with penalties and interest.
Furthermore, if you do not file a tax return the IRS will request for it. However, if the taxpayer still doesn't file a tax return after the IRS requests for it, the IRS is authorized under Section 6020(b) to file a tax return on your behalf based upon the information that was reported to the IRS. This is called a "Substitute for Return." Once the IRS files that return, one of two things can happen: 1. if the taxpayer owes money, the IRS will assess it and begin collection against you; and 2. if the IRS shows that you were due a refund, they will stop the process. In addition, if the IRS prepares this Substitute for Return, it will not include any exemptions or expenses you may be entitled to and may overstate your real tax liability. Accordingly, once the tax is assessed the IRS will start the collection process, which can include placing a levy on bank accounts or wages or filing a federal tax lien against any property that you may owe.
However, there may be opportunities to avoid criminal/civil penalties and civil proceedings by filing late tax returns, albeit with penalties and interest, and bring your status current with the IRS, by filing and paying your back taxes. When you realize that you have not filed your return, it is better to file sooner than later. You will want to gather all of your tax documentation for every year that you did not file. In this case, you will need to hire a tax professional (an attorney with a CPA and LL.M. in Taxation preferred) to help you through the process.
After a taxpayer hires an attorney, the taxpayer should be ready to pay some or all of the back taxes owed, or if the taxpayer can't afford to, try to make a deal with the IRS. For example, a taxpayer may be able to enter into an installment agreement with the IRS, where the taxpayer can pay back taxes owed in monthly installments for a period of up to 60 months. In addition, a tax payer may also be able to make an offer in compromise. An offer in compromise is an IRS tax settlement program that allows taxpayers to settle their back taxes for less. Furthermore, a taxpayer may try to get declared "uncollectible" by proving to the IRS that the taxpayer can't pay taxes owed and will not be able to pay taxes in the near future. Finally, in preparing for this uphill battle, taxpayers should gather all the proper documents needed to file an unfiled tax return. Specifically, taxpayers must obtain their old W2s, old 1099 tax documents, and any other related tax information that will be necessary for filing. Accordingly, although this uphill battle seems like an impossible feat, it can be overcome by hiring a qualified tax attorney.
Contact the Bucci Law Offices today at either 954-764-4440 or 877-764-4440 for your free initial consultation and let our experienced tax attorneys guide you through this stressful time by dealing with the complexities of the tax laws, as well as the IRS and state authorities.
Christin Bucci, Attorney and Counselor at Law, LL.M., C.P.A.
*Member of the Florida Bar, Federal Bar for the Southern District of Florida, Ohio Bar, District of Columbia Bar, United States Supreme Court Bar & United States Tax Court*
