The vast majority of taxpayers do file their tax returns with the IRS every year. However, according to some estimates, about three percent of taxpayers do not file tax returns at all. If a taxpayer does not owe any taxes, the penalties are not severe. But failing to file a tax return in years where one does owe taxes is a crime. The penalties can be quite severe. For example, for each year a taxpayer fails to file a return, the IRS can fine that taxpayer up to $25,000, or the taxpayer can be sentenced to one year in prison. And this is just for being negligent. If a taxpayer does not file a return in an effort to evade taxes, the IRS can pursue felony charges, including a fine up to $100,000 or a maximum of 5 years in jail. While incarceration is rare, the threat is real and should deter those considering evading taxes.
It is wise to file a return even in cases where a taxpayer may not have enough resources to pay the entire tax bill. The IRS will work out a payment plan with taxpayers in these cases. There is a six-year statute of limitations for filing criminal charges based on failing to file a tax return, but there is no statute of limitations on how long the IRS can seek taxpayers and demand payment or taxes owed on non-filed returns.
The IRS may penalize taxpayers for filing tax returns late. Depending on the circumstances, there can be criminal or civil trials. At the very least, the IRS may withhold refunds to the taxpayer. If the taxpayer actually owes taxes from a late return, the IRS can levy a late filing penalty of 5 percent per late month to a maximum of 25 percent. Additionally, the IRS may impose a = percent to 1 percent late payment penalty to the late filing penalty. In the meantime, interest is accumulating on the debt to the IRS. Thus, it is in taxpayers’ best interests to file late returns before they are contacted by the IRS.
The IRS usually does not pursue criminal charges against taxpayers who file of their own volition before the IRS has contacted them. The IRS also tends to be more sympathetic in collecting taxes from taxpayers who volunteer their late returns than taxpayers the IRS had to investigate and “catch.” If the IRS identifies an errant taxpayer before the taxpayer has a chance to file a late return, the manner in which they contact the taxpayer is an indication of how seriously they may treat the particular case. The IRS uses four ways to notify taxpayers of fraud or other criminal tax behavior:
- Most non-filers receive a non-threatening written request from the IRS Service Center.
- A letter or personal call from a Taxpayer Service Representative gives taxpayer a deadline for filing (usually 30 days).
- A call or personal visit from a Revenue Agent or Officer gives the taxpayer a deadline by which to file returns directly to the agent. The agent may even offer to assist in preparing the missing returns. Note that if a taxpayer refuses to file, the IRS can legally prepare a return, which is never in a taxpayer’s best interest.
- The worst way to be notified is by a visit by a Special Agent in which the taxpayer is informed that he or she has become the subject of a criminal investigation.
Considering all the above, it appears crucial to file one’s tax returns within the deadlines. If a taxpayer needs more time to file, the IRS has a fairly simple method to request an extension for time to file. But do not fail to file at all. If one has failed to file returns in the past, it is best to go ahead and file late returns before coming to the attention of the IRS. If one owes taxes from late returns, it is advisable to go ahead and pay the debt as soon as possible, even if one must borrow the amount. It costs more to owe the IRS than it does almost anybody else. If a taxpayer has not filed returns in many years, the taxpayer should not worry about being caught if the taxpayer resumes filing. The IRS computers do not search for such taxpayer information. Besides, the IRS wants to encourage non-filers to start filing again.