We Can Help With Your Tax Problems!

Unfiled Tax Returns

IRS Failure to File Compliance:

Most non-filing investigations are initiated by the IRS based upon computer matches. The IRS uses both a "stop filer program" and a "non-filer program" to discover return delinquencies. If a taxpayer has filed tax returns in the past and then a return is not filed for the next tax period, that taxpayer is identified as a "stop filer". If information documents (such as W-2s and 1099s received by the IRS) reflect reportable income and no return has been filed then that taxpayer is identified as a "non filer".

Normally the IRS will initiate a non-filing check 15 months after a Form 1040 (Individual Income Tax Return) is due from a "non-filer" or 4 months after the due date for a "stop filer". In the case of business taxes and payroll taxes, such as Form 941 returns, a delinquency check begins 8 to 9 weeks after the due date of a return.

Normally the IRS will attempt to secure returns from "non filers" and "stop filers" by sending notices from the Service Center requesting that returns be filed. If the taxpayer fails to file despite the computerized notices, the IRS may follow up in several different ways. It may prepare tax returns for the taxpayer based upon information documents it has received from others. It may attempt to contact the taxpayer by telephone or it may assign the matter to a Revenue Officer for field investigation.

The Internal Revenue Service will normally issue four (4) computer notices prior to a personal visit or a personal phone call. For individual income taxes, then notices are issued over a six (6) month period. In the case of business taxes, the Internal Revenue Service will normally issue three (3) notices spaced over a period of 22 weeks.

Criminal Non-Filing:

Failing to file returns is a criminal misdemeanor in the federal system. In some instances, failing to file can be a criminal felony. Certain individuals are more likely to be prosecuted by the IRS than others. The complete guidelines regarding criminal non-filing are contained in the Internal Revenue Manual. Here is a partial list of those matters of interest to the IRS Criminal Investigation Division:

1. The non-filing involves known organized crime figures and persons alleged to be receiving graft or income from illegal sources.
2. The taxpayer's occupation and education denote prima facia evidence of knowledge concerning his/her filing obligations. Examples include public officials, attorneys, accountants, stock brokers and business executives.
3. The non-filer is a tax protester.

In instances where a taxpayer has failed to file returns, he should be alert for indications that the IRS has referred the matter for IRS criminal investigation. If the IRS representative identifies himself as a "special agent", has a gold badge with the words "Criminal Investigation Division" or gives the taxpayer his "rights against self incrimination", that taxpayer should not speak with the IRS representative but should immediately seek legal counsel.

Failure to File Strategies:

For most taxpayers, the act of non-filing is a creditor/debtor issue. The IRS, however, is an extremely aggressive creditor with broad ranging statutory powers to collect tax deficiencies. Unlike regular civil cases and ordinary debt, the IRS need not reduce the debt to civil judgment; rather the IRS need only rely on the fact that a tax deficiency has been assessed (see statutory federal liens as discussed in the lien and levy section of this website), the taxpayer has been properly noticed of the tax deficiency and the IRS' intent to levy and the taxpayer has failed to pay the tax assessment. Once these prerequisites exist, the IRS may seize and levy upon taxpayer's property.

The non-filing client is perhaps the most common IRS collection problems encountered by tax practitioners. If the tax practitioner is an accountant, the accountant must determine whether the taxpayer has criminal exposure for failure to file returns which is a misdemeanor, or for tax evasion which is a felony. Usually the exposure is there. It is always advisable to refer the client to an attorney in order to protect the client with the attorney-client privilege. Alternatively, the accountant may hire an attorney to prepare the returns for the client.

Delinquent returns must be prepared and filed. The question usually arises as to what is the best way to file these returns. There is no single answer to this question although the ultimate goal is always to file the returns. Filing is always a more financially attractive alternative than letting the IRS prepare the returns. Additionally, unfiled tax returns do not have a statute of limitations. In other words, an assessment made by the IRS from internal documents, and not from a taxpayer filed return, can be an open and legal lien twenty and thirty years down the road. As a practitioner, I have seen tax liens twenty-six years old still being aggressively collected by tax authorities.

Many clients come to tax practitioners at the last possible moment, usually under aggravated circumstances. Their wages have been garnished or the IRS has levied their bank account. The wage levy in particular has disastrous effects on the employer/employee relationship and the taxpayer's standard of living. A wage garnishment is a "continuing levy" and will not be removed until the taxpayer takes affirmative action in dealing with the IRS.

Clients are frequently confronted with the following question: "should I file the return right now, or wait until I have the money to pay for it?". The answer is very simple. The return or returns should be filed as soon as possible. If the client has any money at all available for payment, a check should be enclosed with the return. The reason is that non-filing clients are facing one of the highest penalty rates which the IRS is allowed to impose. The failure to file penalty rate is 5% per month up to a maximum of 25% of the tax due but unpaid by the due date of the return. Filing a timely return without payment, on the other hand, only results in a late payment penalty, which ranges from .05% to 1% per month. In all cases the IRS will add interest at the statutory rates.

Filing a return without full payment will result in an overall lower tax assessment than non-filing. The IRS is generally quite favorable to entering into an installment agreement arrangement to pay back taxes. Installment agreements are discussed elsewhere on this website.