By Stephen J. Dunn
You fail to file your income tax returns, for whatever reason. Maybe you were busy and overlooked your tax returns. Or perhaps you did not have the money to pay your income tax due. The next year, the tax filing deadline comes and goes, and once again you fail to file your tax returns. Now you want to remain off the IRS’ radar. Before you know it, you owe several years’ tax returns. The pattern is familiar.
You should file your delinquent tax returns as soon as possible. Neither the three-year statute of limitations on assessment of tax and penalties for the years in question, nor the 10-year statute of limitations on collection of such assessments, begins to run until you file your tax returns.
Moreover, taxes due on a delinquent tax return are not dischargeable in bankruptcy. Such taxes do not become dischargeable, if at all, until two years after filing the delinquent return (and three years after the return was last due, with extensions).
If the IRS has reason to believe that the taxpayer has income for a year, and the taxpayer refuses the IRS’ requests that the taxpayer file an income tax return for that year, the IRS can prepare a “substitute” tax return for the taxpayer for that year. A substitute tax return counts as an assessment enabling the IRS to begin collection action against the taxpayer. But a substitute return does not start the three-year statute of limitations running on assessments against the taxpayer for the year in question, nor the 10-year statute of limitations on collection of such assessments. Worse yet, a substitute tax return reports gross income, but not any deductions. To claim available deductions the taxpayer must prepare and file his actual tax return.
You should file your tax returns even if you don’t have the money to pay the tax reported on them. The IRS assesses separate civil penalties for failure to file tax returns and for failure to pay tax. The penalty for failing to pay tax reported or required to be reported on a tax return is one-half of one percent of the unpaid tax for each month of the failure, up to a maximum of 25 percent. The penalty for failure to file a tax return due is a whopping five percent of the tax required to be reported on the return for each month of the failure, up to a maximum of 25 percent. The IRS can abate penalties upon a showing of reasonable cause. Interest accrues on assessments of tax and penalties.
In extreme cases, the IRS prosecutes a willful failure to file tax returns. In 2006, actor Wesley Snipes, Eddie Ray Kahn, and Douglas P. Rosile were indicted for conspiring to defraud the United States, and of knowingly making, or aiding and abetting the making, of a false and fraudulent claim for payment against the United States, both felonies. Snipes was also indicted for failing to file a tax return from 1999 through 2004, a misdemeanor. Snipes had been a client of American Rights Litigators, which Kahn operated.
Kahn and Rosile were convicted on the conspiracy and false claim charges. Snipes was acquitted of those charges, but he was convicted of failing to file an income tax return for three years. Snipes was sentenced to the maximum one year imprisonment for each year, to be served consecutively, a total of three years. His conviction and sentence were upheld on appeal. He began serving his sentence in 2011.
Indeed Snipes was badly advised. The IRS need not wait until Snipes has served his sentence to begin civil tax proceedings against him. The IRS knows the amounts of Snipes’ gross income from Forms 1099 filed with it, or it can discover such amounts by use of its summons power. The IRS can prepare substitute returns for Snipes, reporting gross income but not deductions. To claim available of deductions Snipes must prepare and filing his actual tax returns—which he should have done in the first place. Unlike a criminal tax prosecution, in which the U.S. government must prove its case beyond a reasonable doubt, in a civil tax case the burden is upon the taxpayer to disprove the IRS’ proposed assessment.
Once the IRS has assessed the tax and penalties, it can begin seizing property to collect the assessments.