You might ask yourself, can the Internal Revenue Service (IRS) come after me if I do not file my tax return? The short answer to this question is YES!. Taxpayers might not file a tax return for a multitude of reasons. One reason might be that the taxpayer knows they will have a large tax bill when they file. So, the taxpayer thinks that if they do not file the return they can put off the pain of the bill. Another reason might be that the taxpayer believes if they keep a low profile the IRS will forget about the tax return. Both of these assumptions and many others are inaccurate and can lead to the taxpayer getting into deeper tax debt and ultimately to a much larger tax bill and potentially criminal action initiated by the IRS.
Before pursuing a delinquent return, the IRS will give the taxpayer a chance to file the return themselves. The IRS will send a letter (CP-516) by mail to the taxpayer. The letter is requesting the taxpayer to submit the missing tax return. In most situations, the taxpayer submits the tax return and pays any outstanding balance. At that point, the matter is closed with no additional actions taken by the IRS. However, for those individuals who do not file the return is requested, they are setting themselves up for a more contentious and costly situation confrontation with the IRS.
The first issue steps the IRS will take regarding the non-filing of a tax return is the penalize the taxpayer. The total tax bill will increase by as much as 25% with a Failure-to-File penalty. This penalty starts to run at a rate of 5% on the due date and continues for five months or until the return is filed, whichever is sooner. For most people, the thought of adding potentially 25% to the total tax bill would be enough to spur action. By waiting to file the return past the filing deadline is increasing the tax balance. The calculation is different for multi-member LLCs and corporations. Failure-to-File penalty for these entities can be even higher than for 1040 filers.
If the taxpayer continues to not file a tax return, the IRS will file a return on the taxpayer. The return filed by the IRS is called a substitute for return (SFR). It is seldom a good move to allow the IRS to file the substituted return. The IRS creates the return with all of the taxpayer's financial information that is reported to the IRS (W-2s, 1099s, etc.). After compiling the data, the IRS will give the standard deduction and a personal exemption. Outside of these standard reductions, the IRS will not take into consideration any expenses or itemized deductions information and usually leads to a tax bill that is higher than what the taxpayer would have received if they had created the return themselves (or through a tax professional). The SFR can be removed; however, the taxpayer will have to have the tax return created and request the IRS replace the substituted return with the taxpayer created one.
Another fallout from having the IRS create a substitute for return is taking away the ability to get rid of the debt through bankruptcy. For individual taxpayers (filing a 1040), they can have the tax debt discharged through bankruptcy if they file the return and wait two years before filing for bankruptcy; however, if the IRS files an SFR, the taxpayer can never discharge that particular tax year in bankruptcy regardless of how long they wait before filing.
Finally, if a taxpayer intentionally decides not to file their tax returns, the IRS could pursue criminal action against the taxpayer. It is a crime to willfully fail to file a tax return. Furthermore, it is a felony to try and actively evade paying taxes.
The primary takeaway from this blog should be to file your taxes on time. I understand that the taxpayer might not be able to pay the tax bill. The IRS has multiple tools in place for taxpayers that find themselves in that situation. But by not filing the return, the taxpayer is making their situation worse.
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At Napoleon Law Firm, our attorney routinely represents taxpayers in IRS civil tax cases located in Memphis and Jackson Tennessee; Southhaven, Horn Lake, Olive Branch, and Oxford Mississippi; and, West Memphis Arkansas. Because he is a licensed attorney, he can represent IRS cases across the country.