There are a variety of reasons why an individual may have not timely filed one or more years’ tax returns. Reasons for non-filing can include emergency, illness, personal or business hardship, or a natural disaster, to name just a few. The federal Internal Revenue Service (IRS) assesses a penalty for failure to file tax returns by the due date — typically April 15th, or, if an extension is requested, the extended due date.
The failure to pay back taxes owed on unfiled returns also subjects an individual to penalties. If an individual can demonstrate a sound reason for the failure to file or pay, the IRS may reduce the penalty amounts owed, in part or in whole.
By contrast, tax evasion — deliberately refusing with no valid excuse to report income to the federal Internal Revenue Service (IRS) and to pay taxes on that income — is a crime. This crime one may result in not only substantial monetary penalties, but even imprisonment for refusal to pay.
Some individuals fail to file tax returns for one or more previous years, without having requested a deadline extension or otherwise contacted the IRS about the failure. These individuals are generally still permitted to file past-due tax returns and pay back taxes owed.
Failure to file returns, and failure to pay taxes on those returns, both carry monetary penalties. These penalties run concurrently (at the same time). Both penalty amounts accrue the day after the filing due date, and generally consist of a percentage of the total amount of unpaid taxes.
The failure-to-file penalty is generally greater than the failure-to-pay penalty. The combined penalty amounts for a given month cannot exceed a fixed percentage of the total amount of unpaid taxes owed for that month.
To be eligible for a reduction in or removal of penalty amounts, an individual may contact the IRS, which generally works with individual non-filers who voluntarily come forward and cooperate with it.
Generally, to avoid being subject to late-filing or late-tax paying penalties, an individual must show “reasonable cause” for the failure to file or pay. An individual can demonstrate reasonable cause by showing that under the facts and circumstances of their situation, they used care and prudence to meet their tax obligations, but could not do so for a “sound reason.”
Examples of sound reasons include:
- Fire, casualty, natural disaster, or other disturbances; or
- Death, serious illness, incapacitation, or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family.
Individuals who can establish a sound reason for filing and paying late, may receive a waiver of penalties. These individuals will still be required to pay the back taxes owed. The IRS may work with individuals to negotiate a settlement of taxes owed. A settlement may take the form of an installment plan, which is an agreement under which the individual pays a specified amount each month.
The IRS, as part of the settlement, may permit an individual to make reasonably estimated deductions for one or more prior years’ returns, for items such as charitable contributions and medical expenses.
Tax evasion is an intentional nonpayment of a lawfully imposed tax — in other words, it is a fraud committed upon the government. Tax evasion is a felony, and a conviction for tax evasion can subject an individual to fines, penalties, and even imprisonment of up to five years.
Since the IRS has methods for detecting non-filers, individuals who refuse to file returns and pay taxes on those returns cannot “hide” from the IRS. In addition, the more blatantly fraudulent the behavior is, the greater the likelihood of prosecution becomes. Non-filers who have repeatedly been contacted by the IRS about their non-filing status and who have nevertheless deliberately failed to file, year after year, are particularly likely to face prosecution.
Individuals who cannot timely file the current year’s tax returns may seek an extension of time in which to file those returns. The extension must be sought by the initial filing deadline. Generally, the IRS may grant an extension of time in which to file for up to six months from the initial filing due date.
Individuals who timely request an extension and who pay at least 90 percent of the taxes owed along with the request, can avoid a failure-to-pay penalty. However, these individuals must pay any remaining balance by no later than the extended due date.
If you have not filed tax returns or paid taxes for one or more years, you may wish to hire a tax lawyer for assistance. A tax lawyer near you can assess the facts and circumstances of your case and can explain the relevant tax laws. They can communicate with the IRS on your behalf to ensure that your case is resolved with your best interests in mind.