The Dangers of Unfiled Tax Returns

May 25, 2017

Most of us have heard the procrastinator’s motto: “Why do today what can be postponed until tomorrow?” When it comes to unfiled tax returns, however, the tomorrows start piling up to the point that you’re very soon in serious trouble. What dangers do you face if you have unfiled tax returns with the Internal Revenue Service?

When Do  Unfiled Tax Returns Become Criminal?

Believe it or not, the willful failure to file a tax return is a misdemeanor pursuant to Internal Revenue Code (IRC) § 7203. Conviction of the charge is punishable by up to one year in jail and a fine of as much as $25,000. Moreover, if you fail to file a return for multiple years, each failure is considered as a separate misdemeanor. Where the taxpayer is guilty of an overt act of evasion, willful failure to file can be elevated to a felony under IRC § 7201.

Late Filing Penalty

Failure to file a return on a timely basis results in a late filing penalty of five percent of the total tax due per month. Note that this penalty is not a one-time computation; five percent of the unpaid tax is added for each month or partial month you delay in filing (up to a maximum of five months – a 25 percent penalty).

Failure to Pay Penalty

In addition to the late filing penalty, those who have unfiled returns are also subject to a failure-to-pay penalty of 0.5 percent (per month, again up to five months). This may not seem like a stiff penalty, but when this is combined with compounded interest, penalties, and even interest on the penalties, the amount adds up. As some tax experts say, it’s better to owe a bookie than it is to owe the IRS.

Substitute Return Filed by the IRS

Occasionally, when a taxpayer has failed to file for some period of time, the IRS will prepare a tax return for the taxpayer, based upon information that is available. This is called a substitute return and it is usually filed by the IRS in order that it can begin tax and collection activities. Generally speaking, the taxpayer is allowed to file his or her own return within 30 days or otherwise explain that there is no requirement for filing (not likely to be the case, however).

Tax Collection Efforts by the IRS

Tax experts agree that the IRS is the toughest collection agency in the United States. Unlike other bill collectors, the IRS has the power to:

  •  Garnish your wages (also called a wage levy)
  •  Seize your personal property
  •  Levy on your bank accounts and other investments
  •  File a tax lien on your real estate

What if You Just Can’t Pay?

Unfortunately, from the perspective of the IRS, not having the money to pay the tax is not a valid excuse for not filing the return. There are occasions in which, if the IRS can show that you decided not to file because you lacked the resources to pay the tax, your decision not to file was “willful” and can potentially subject you to a misdemeanor charge, as noted above.

If you can’t pay the tax, you still need to file. You may qualify for an installment payment program or, in some instances, the IRS may even compromise on the amounts that are due. Ignoring the issue, however, won’t make it go away.

Mackay, Caswell & Callahan P.C. – Experienced New York Tax Attorneys Ready to Help

Do you have unfiled tax returns? If so, contact one of the Upstate New York tax attorneys or New York City tax attorneys at Mackay, Caswell & Callahan P.C. today. We have offices in Albany, New York City, Rochester, Syracuse, Utica, and Watertown. We have more than 30 years of experience handling all types of tax controversies including audit representation, collection defense, civil tax litigation, and criminal tax defense. We are committed to achieving the best results for our clients as efficiently as possible, with straight talk and effective solutions. Call us or contact us using our online form.

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