If you have unfiled tax returns, it’s important to understand the IRS’ enforcement procedures. The IRS takes non-filing seriously and can impose civil and criminal penalties (including jail time). However, an experienced tax lawyer can help you file your unfiled returns and resolve your tax problems.
The IRS Identifies and Penalizes Non-Filers
According to IRS studies, roughly ten million Americans fail to file their tax return each year. While many of these non-filers simply made an honest mistake, others are intentionally avoiding their tax liabilities. The IRS identifies most, if not all, of these non-filers. Using sophisticated software tools, a multidisciplinary task force (including auditors and agents) identifies and investigates non-filers.
You may face both civil and criminal penalties for unfiled tax returns. Civil penalties involve:
- Loss of your tax refund,
- Loss of certain tax credits, and
- Tax liens and levies.
You may also have problems filing for bankruptcy if you have unfiled tax returns. The IRS does not have a civil statute of limitations for unfiled tax return charges. In other words, it can seek civil penalties at any time — even if the unfiled return is decades old.
In more serious cases, the IRS can press criminal charges. Criminal penalties include:
- Failure to file a tax return: up to a year in prison and $25,000 in fines for each unfiled return,
- Filing a fraudulent tax return: up to three years in prison and $100,000 in fines, and
- Tax evasion: up to five years in prison and $100,000 in fines.
Tax return fraud and evasion are both felony charges. In criminal cases, there is a six-year statute of limitations (the IRS must file charges within six years of your non-filing).
Voluntary vs. Enforced Compliance
Don’t panic if you have unfiled tax returns. However, it is important that you act quickly and seek help from a tax lawyer. A tax lawyer can help you voluntarily comply with the IRS, which may help you avoid serious penalties. However, once the IRS begins an investigation of your unfiled tax returns, your options may become limited.
The Benefits of Voluntary Compliance
It’s always best to voluntarily comply with the IRS. If you have unfiled tax returns, you can use the IRS’ “voluntary disclosure” procedures to file these returns. Sometimes called an amnesty program, voluntary disclosure may help you avoid serious criminal charges. You qualify for voluntary disclosure if you:
- Voluntarily report your unpaid tax returns,
- Only have legally-obtained income,
- Report your non-filing before the IRS initiates a criminal investigation,
- Submit an accurate tax return and cooperate with the IRS, and
- Fully pay your tax debt or make a legitimate payment arrangement (such as an installment agreement).
It is vital that your late return is accurate and fully discloses your income. If you submit an inaccurate tax return, you may face criminal prosecution.
IRS Investigations and Substitutes for Returns
If the IRS identifies you as a non-filer, it will begin sending notices (sometimes called CP Notices). Typically, the CP Notices are sent over a period of 22 to 26 weeks. If you ignore these notices (or fail to respond), the IRS will enforce compliance. Enforced compliance may involve:
- In-person contact from a revenue officer,
- An investigation of your income, involving contact with your employer, family members, neighbors, and others, and
- The IRS’ preparation of your unfiled tax return (called a Substitute for Return).
When the IRS prepares a Substitute for Return (SFR) for you, the tax bill computed by the IRS is usually significantly higher than it would be if you prepared an actual return. The IRS uses a filing status of “single” or “married filing separately” with just one exemption (the taxpayer) and with just the standard deduction (no mortgage interest, no state tax deduction, no contributions, etc.). The IRS also uses a cost basis of zero for any stock you may have sold during the year.
Because the significant penalties and interest added are based on the unpaid tax amount, higher tax means higher penalties and interest, too.
Once the IRS has prepared a Substitute for Return for you, you must follow certain procedures if you want to reduce your liability to what it truly should be based on your particular circumstances by filing your own late tax return.
The Importance of Attorney-Client Privilege
Unlike other tax professionals, your discussions with your tax lawyer are fully privileged. In other words, your lawyer cannot disclose the substance of your conversations during either a civil or criminal investigation. In comparison, your discussions with an accountant are only privileged for civil matters. An accountant must disclose your information during a criminal prosecution. And, conversations with a “tax preparer” are never privileged.
Your discussions are protected by attorney-client privilege. Therefore, you can discuss your unfiled tax returns candidly with your lawyer. This allows your lawyer to get the best possible information — allowing him or her to craft a solution tailored to your needs and goals.
Consult With a Tax Lawyer About Your Unfiled Tax Returns
If you have unfiled tax returns, contact the Sodowsky Law Firm immediately. We guide our clients through the compliance process and will negotiate with the IRS on your behalf. Contact us to schedule your confidential and personalized evaluation.