What Can Happen if a Taxpayer Fails to File Taxes?
While CPAs, accountants, and tax professionals frequently warn taxpayers regarding the parade of horribles that can occur if a taxpayer falls out of compliance with the U.S. Tax Code. Despite these warnings, taxpayers still fail to file taxes for an array of reasons. Some taxpayer – particularly expatriates – may fail to file their income taxes because they do not realize they have an obligation to report all income inclusive of foreign income. Other taxpayers may fail to file because they become overwhelmed with the complexity of their tax filing. Still others may fail to file taxes simply because they do not think the IRS will notice their non-filing.
If you stopped filing taxes because you didn’t know where to start or made good faith mistakes regarding your filing obligation, U.S. tax accountant and CPA Ted Kleinman may be able to help. At U.S. Tax Help Ted is proud to assist taxpayers living in the United States and abroad. To schedule a no-cost consultation, call U.S. Tax Help at (541) 923-0903 or contact Ted online. Also, please see our information on important 2017 dates for American expatriates.
How Does the IRS Detect Tax Non-Filers?
As mentioned above, at least some taxpayers do not file taxes because they believe the likelihood of facing an enforcement action is remote. Other taxpayers may simply decide to abandon their compliance efforts when they believe that enforcement is unlikely and they are facing a complex and confusing tax issue. Unfortunately, for taxpayers who engage in this type of action, the IRS has developed multiple systems to catch tax non-filers. In fact, a failure to file taxes is one of the most straightforward tax compliance failures for the IRS to detect.
This is because the IRS has invested significant resources in computer and automated systems to detect routine forms of tax fraud. Through its form matching and information matching programs, the IRS can detect routine discrepancies. The form and information matching programs leverage the fact that both the employer and the worker will file corresponding reports of income. If the employer files a W-2 or 1099 for an employee and the employee does not, it is typically a clear sign that the employee has failed to report income or failed to file taxes entirely. The information matching program allows the IRS to cross reference the income and other numbers you report against those reported by your employer. If some or all of the numbers don’t match, it’s typically a sign that the taxpayer made an error or mistake.
What Penalties Can I face if I Don’t File My Taxes?
Taxpayers who do not file their taxes are typically subject to a failure to file penalty imposed under Internal Revenue Code (IRC) § 6651(a)(1). This failure to file penalty is assessed at five percent of the amount of unpaid tax per a month. If the taxpayer does not satisfy this obligation, the penalty is assessed for each month or partial month it remains unfulfilled. If the taxpayer also had tax due, he or she may also face the failure to pay penalty. Like the failure to file penalty, this penalty is also assessed for each full or partial month the obligation remains unsatisfied. If both the failure to file and the failure to pay penalties are incurred, the penalties are adjusted downwards.
However, outside of penalties, the taxpayer will also face accumulating interest. Interest will be owed on any unsatisfied tax debts. Over the period of several years, the accrual of interest can significantly increase one’s tax liability.
Can I Reduce the Back Taxes I Owe?
It is important to note that not every tax non-filer will face an unsatisfied tax burden. In fact, because filing a tax return is the only way a taxpayer can claim their refund, they may even be owed money by the IRS. However, if you do owe back taxes, you may have options to reduce what you owe.
For instance, if your tax non-filing was due to the irresponsibility of a former spouse, you may qualify for Innocent Spouse Relief. Under this program, the innocent spouse can be relieved from liability for tax debts if he or she meet certain requirements. Taxpayers can also explore the Offer in Compromise Program which may allow you to negotiate your tax liability on the basis of your reasonable collection potential. Furthermore, taxpayers may qualify for a payment plan that can make a tax debt more manageable.
To discuss your options to address unfiled taxes or unpaid taxes, call CPA Ted Kleinman at U.S. Tax Help at (541) 923-0903.