Unfiled Tax Returns and Late Tax Returns: Top 5 Things to Know
Unfiled tax returns happen. It may be due to having too much on your plate, procrastination or fear, or it may even be intentional. Regardless of cause, the fix is the same. If you or someone you know has tax returns that are not filed, here are the top five things to know about unfiled tax returns.
Failure to File is a Crime, But Criminal Penalties are Rarely Pursued.Failing to file a tax return can be a criminal offense in some circumstances.
The government usually only pursues criminal charges for failing to file tax returns if the amount of tax that went unreported is significant and if it feels that it can prove that the failure was willful. The government has the burden to prove that the non-filing was willful. This sets a pretty high standard for the government.
Depending on the amount of tax that will be reported and unpaid, it may be possible to get clearance letters or agreements that the government will not pursue criminal penalties if you voluntarily file your tax returns.
The government typically handles unfiled tax returns as a civil matter. There are exceptions of course, particularly for celebrities, politicians and tax return preparers--which the government often tries to make an example out of to garner the most media coverage.
The IRS*s Clock Does Not Start Until Returns are Filed.There are several time limits that restrict what the government can do when it comes to assessing and collecting taxes. Many of these time limits do not start running until a tax return is filed.
For example, the IRS generally has three years from the date a tax return is filed to make changes to increase the tax in excess of the amount reported on the return. The IRS then has ten years to collect the tax, with the ten year period starting from the date the return was filed. There are also rules for discharging unpaid taxes in bankruptcy that do not start running until a tax return is filed.
The takeaway with this point is that tax returns should almost always be filed, even if the tax reported on the returns is not paid.
The IRS May Prepare a Tax Return for You--And That is Usually Not a Good Thing.If the IRS has evidence that a taxpayer received taxable income and has not filed a return, it may prepare a substitute tax return for the taxpayer. This typically happens when a third party reports taxable wages or income to the IRS by filing a Form 1099-MISC or W-2 with the government.
The IRS's prepared returns will almost always result in more tax being due than what would have been due had the taxpayer filed their own return. This happens because the government-prepared returns do not account for all of the deductions and credits the taxpayer may be entitled to.
The substitute for return may also preclude the taxpayer from being able to discharge the tax debt in bankruptcy. This is true even if the taxpayer files a tax return at a later date.
Failure to File Penalties Will Apply; Failure to Pay Penalties May Apply.Filing late tax returns can also trigger civil penalties. Once the late tax returns are filed, the IRS will typically assess late filing penalties. This penalty is equal to five percent of the unpaid taxes, accrued monthly, not to exceed 25 percent of the amount of the unpaid taxes.
The IRS will also assess late payment penalties. The calculation for this penalty is more complex, but generally, it is the smaller of $135 or 100 percent of the unpaid tax.
These penalties are only assessed if the return is filed more than 60 days late.
Both penalties can also be abated if the taxpayer can establish reasonable cause for the failure to file or pay. In addition, the IRS has a generous first time abate policy that can allow the IRS to remove one or both of these penalties. The IRS applies this policy upon request by the taxpayer if the taxpayer has not had other penalties in the previous three years.
You May Not Get Credit for Some Withholdings.Wages and estimated payments that are made more than three years go will typically not be credited to the taxpayer's account if the taxpayer files a tax return after three or more years have passed.
These funds are transferred to excess collections. Excess collections refers to funds on account with the Federal government that are not applied to a specific taxpayer account. Think of this as the general fund where monies are not identified as coming from any particular source. While the IRS can sometimes get these funds re-credited if there was an error of some sort, it does not do so when there are unfiled tax returns.
This rule can catch taxpayers by surprise. When this rule applies and the withholding credits are not applied, the taxpayer may be surprised by the amount of taxes due.