You should file the current year tax return with the IRS immediately and pay the balance if possible. If you do not pay the balance, the IRS will not let you enter into an installment agreement since you are not current. The IRS has a collection look back period of 6 years so if the IRS has not filed substitute returns for you for years prior to 6 years, they most likely will not be requesting you file such returns. Before the IRS can garnish your wages or levy your assets, the IRS must send you by certified mail a notice of intent to levy and a right to a collection due process appeal, aka, letter 1058, which you must file a collection due process appeal on a form 12153 within 30 days on the date of the letter, to keep the IRS from taking enforced collection action. Do not put your head in the sand. An experienced professional in your area or another state should be retained to assist with this matter as you have criminal exposure for failure to file/tax evasion due to your non-filing of tax returns for a long period of time.
The state of Arizona will continue to garnish your social security and levy your bank account(s) until they are paid in full or you set-up an installment agreement. I would suggest you contact the state to set-up an installment agreement. If your income is low that state may allow you to go into hardship status, which means you will not have to pay for a period of time. However, the state will revisit the hardship status and will eventually get paid. Remember, during hardship, the penalties and interest continue to accrue.
I generally agree with the other attorneys. The IRS will charge a late filing penalty, late payment penalty, if there is anything due and interest. You can request penalty abatement if there is reasonable cause. Depending upon the length of time he and/or you do not file, the IRS could criminally investigate and possibly charge you with misdemeanor failure to file or tax evasion. If you have income over a certain amount, you need to file your returns.
Assuming you are talking about criminal tax fraud, it depends. The Advisory Sentencing Guidelines look at the tax loss in addition to other factors that may increase the offense level. You may have circumstances that warrant a downward departure. Also, if you provided assistance to the government, the government may move to have your sentence reduced and/or eliminated. Finally, it depends upon the sentencing judge as he/she has latitude in handing down a sentence.
In most cases, I would say yes. It depends upon what issues the IRS is auditing. Do you have unreported income? Were the expenses you took travel and/or meals and entertainment? Can you recreate any of the expenses? How much money are we talking about? In some cases, you can bring in an experienced CPA who can handle the audit. However, if the case goes criminal, there is no accountant privilege. Be careful as the IRS will most likely open up 2012 if already filed and possibly 2010 if there is enough time.