With the exception of those who have appropriately obtained a six-month extension, April 15th really is the deadline to file the previous year’s personal income tax return. This is not an IRS suggestion – As a matter of fact, it is actually considered a crime to have unfiled tax returns. Take a look at actor Wesley Snipes who was ironically released just days before the April 15, 2013 deadline after serving 845 days of a three year sentence. Snipes’ tax trouble began in 2006 when he was accused of tax fraud, claiming nearly $12 million in bogus refunds. To make matters worse, the millionaire actor decided he wouldn’t file tax returns at all from 1999 to 2004. He was eventually acquitted of the felony federal tax fraud and conspiracy charges – his conviction was a result of failing to file his 1999-2004 returns.

Now before you get too bent out of shape, jail time is typically reserved for those with whom the IRS is looking to make an example of. Most won’t be thrown in jail if they have not filed a tax return or two, but the consequences can still be awfully harsh.

Penalties* -

1. Failure to File - For each month a return is late, a 5% penalty will apply to your net tax liability – limited to 25% (i.e. a $50,000 tax liability could be charged a maximum $12,500 failure to file penalty, resulting in $62,500 due the IRS).
2. Failure to Pay – Additionally, you can face a 1/2 of 1 percent penalty on unpaid taxes for each month your return is late, unless you have filed for an extension and submitted a payment of at least 90% of your actual tax liability by April 15th (also capped at 25%).

*Note – The IRS will typically reduce the failure to file penalty by the amount of the failure to pay penalty when both penalties are applicable to any given month.

Loss of Refund -

You have three short years to file a tax return and claim any refund that might be due with that return. Over the course of my career, I have seen multiple instances in which individuals for one reason or another just haven’t filed returns. The latest instance involved a gentleman who would have been due a refund from the IRS for five straight years had he appropriately filed by the deadline. However, because of his delay in filing, only three of the five refunds could be collected. This statute of limitations also applies to IRS collections of tax, however the three year period does not begin on collections until a return is filed. Therefore, there is no limit as to how long the IRS has to collect taxes due when a return has not been filed.

Substitute Returns - You may fly under the IRS radar, so to speak, for a year or so without any apparent consequences for not filing a tax return. This often leads to individuals thinking they have “beat the system”. While IRS inefficiencies certainly exist, upgrades in computerized systems over the years do an awfully good job of matching income reported to the agency from W-2s, 1099s, etc to filed tax returns. When this income reported by third parties does not match a filed tax return, its a red-flag to the service indicating a return has not been filed. When this happens the IRS reserves the right to file a substitute for return on behalf of the filer (SRF). This form will calculate taxes owed based on taxable income plus penalties without considering credits, deductions and the like. You’d be much better off to file a tax return in this situation.

Garnishments, Seizures of Assets, and Arrest - After receiving multiple correspondences regarding an unpaid tax bill, things can really get dicey. Continuing to ignore these letters can result in wage garnishments, assets seizures and even jail time.

Regardless of your reasoning for not filing a tax return, the best thing to do is work with a licensed tax professional to get your filings up to date as soon as possible. Do not let your inability to pay any tax due prevent you from filing. Many payment options are available.

Stephen Osborne, CPA
Certified Public Accountant
sosborne@mo-cpa.com