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    How Your Unfiled Taxes Won’t Let You Sleep Soundly?

    November 23, 2022 | Late Filed Returns | Tax Debt

    No one likes to carry any kind of debt on them, especially when it is the debt of unfiled taxes for which you might have to pay huge penalties and even go to jail (in very limited cases). So, it is never too late to correct your mistakes and speedily file the tax returns and get the situation under control. Often, you might need the help of a tax lawyer to reduce penalties and make the process go smoothly and reach a solution you can afford to pay.

    Here are a few points that will inform you if you don’t file your tax returns or pay your taxes on time.

    You Will Be Fined Heavily:

    If you don’t pay your taxes on time, the first thing that the IRS will do is charge the tax and it will include penalties. It will begin with the late payment penalty which will become more and more as the amount of time passes before the tax is paid, and if the tax return was not filed on time a tax penalty for not filing on time. The IRS can charge you as high as 49.5% of your tax bill as a tax penalty for not paying and filing on time. There are ways to reduce this penalty, which we can explain based upon your circumstances.

    Your Tax Debt Will Accrue Interest:

    If you do not pay the taxes you owe, it will not only increase the penalty amount on your tax debt but you will also continue generating interest on the unpaid amount. The IRS will send you to notice each month regarding your tax debt and they will also mention the amount of interest that has been accrued on your taxes. As an example, NYS charges 7.5% for unpaid income taxes owed to the State. The federal interest rate fluctuates over time.

    High Chances of Tax Evasion Criminal Investigations:

    If you fail to pay your taxes, then there are good chance that you might have to face tax evasion charges for your unfiled and unpaid taxes. Typically, if you filed but not paid you will not face criminal issues. You need to understand the seriousness of this situation as this gets into the correct criminal side of the law. It could lead you to jail and you have to pay large fines. The investigations will be time-consuming and last longer than expected as a result of which the amount you will need to pay in total is increased by legal fees to defend yourself and any court fees.

    The IRS Might File Your Return If You Fail To Do So:

    This is another unwanted circumstance in which the IRS can file your return if have unfiled tax returns. They will simply consider the amount that others have reported that they have paid you and will file your taxes without considering deductions or other situations into account such as being married or having children. This will be the worst situation you can expect as you will end up paying more than the amount you rightfully owe, and it is time consuming and costly to detail with the IRS auditors who created the substitute return.

    If a taxpayer does not file an income tax return (IRS calls them non-filers), and the IRS deems that a tax return is due to be filed, the IRS will use the information it receives from third parties (employers, brokerage firms, mortgage lenders) and filed W/2 forms, Form 1099, Form 1098, and other similar income reporting forms, to prepare the missing tax return. The tax return is prepared by the substitute tax returns group at the IRS, which is connected to the audit group. The tax return is called by the IRS a Substitute For Return (SFR)

    When the IRS prepares your substitute tax return, they use the highest tax rate and do not include any tax credits you are entitled to. Therefore, the tax computed is higher than what it would have been if you prepared the tax return in most cases. They also treat married people as married filing separately, which also causes the tax rates to increase. They also exclude dependents, which causes a higher tax bill. 

    When you don’t file an income tax return, there is no statute of limitations of when you or the IRS can file a tax return or audit you. The typical rule is that the IRS can audit you for the last three years once you file a tax return, unless they find your income was materially under reported on a filed tax return and they can go back for the last six years. Once there is an assessment, they have ten years to collect. The IRS however, under the Internal Revenue Manual sections 412.1.3, says in general they will only prepare substitute income tax returns for the last six years. The six-year rule also agrees with the IRS policy for non-criminal cases of only looking for taxpayers to file for the last six years if they did not file for a longer period of time.

    The IRS does not file substitute tax returns in all cases when the taxpayer is a non-filer. The IRS looks at whether the taxpayer filed other income tax returns in the past, and just missed one year. This may be an indication that perhaps no income tax is owed if the taxpayer suffered a large loss, and decided they owed no tax. If the taxpayer missed multiple years the tax balance will typically be sufficient for the IRS to file the tax returns, and create a tax bill, and try to collect on it by issuing tax liens and levies through the normal IRS collection process (ACS). Therefore, high income taxpayers have a higher risk of having the IRS use this method. It can also happen if the taxpayer is self-employed and receives a Form 1099, since such income does not have withholding tax taken from it and you could owe taxes. The IRS also looks at whether you had illegal income that needs to be reported. This can happen if you use a check cashing business and do not report all your income by excluding cashed checks. Therefore, the IRS uses its judgment of when a SFR tax return will be prepared by them.


    The Government Can Hold Back Your Refund Checks (If Any):

    If you are expecting any refund, then forget about it as the Government can hold all your checks when you owe them. You might have made so many plans with the refund amount like buying something you have always wanted or started a new business or much more. But sadly, these will be put on hold. Apart from this, the government can take your passport if you have a large tax debt so that you cannot travel outside the country on business or vacation.

    Your Credit Can Be Hurt Due To Your Tax Debts:

    If your tax debt reaches a certain level, it will start affecting your ability to borrow since in most loan situations the bank will ask if you have tax debt.

    Whole Debt Can’t Be Wiped Out With Bankruptcy:

    Getting tax mercy by means of bankruptcy is not so clear and defined as your complete debt cannot be discharged in most cases. Bankruptcy is generally an option when a person has a huge amount as a debt which he cannot pay in any condition. It can’t wipe out the most recent dent, and if you have assets, you often will not see complete relief.

    You May Still Have To Repay Your Local and State Governments:

    In addition to the IRS taxes that you owe, under no circumstances should you forget about the obligations that you still have to your state and local governments. Often, from a criminal perspective you are more at risk of having an issue with the local DA office who handles States crimes than the US Attorney’s office who handles Federal crimes. Your local & state tax bills will keep coming as you are dealing with a completely different department of taxation that has different protocols when compared to the Federal government. This will further make things difficult, as the interest will keep building on taxes that you owe in general. Typically, the state is more aggressive with tax collections, so keep that in mind, and if you have unfiled tax returns the States voluntary disclosure program may be a great step to take.

    Attorney Timothy Hart

    Timothy S Hart, the founding partner of the tax law firm of Timothy S. Hart Law Group, P.C. is both a New York Tax Lawyer & Certified Public Accountant. His area of expertise includes innovative solutions to solve your Internal Revenue Service and New York State tax problems, including tax settlements through the Federal and New York State offer in compromise programs, filing unfiled tax returns, voluntary disclosures, tax audits, and criminal investigations. [ Attorney Bio ]