About 7 million U. S. Taxpayers fail to file required income tax returns each year, while 146 million Americans dutifully file their returns each year. That means that about 5% of the populace fail to meet their obligations to Uncle Sam. As part of its National Research Program the IRS released a study in 2011 of 2006 returns which found that as result of non-filing, the government loses $28 billion per year. Although the IRS makes efforts to force non-filers into compliance, the continuing improvident cutting of the IRS budget allows more taxpayers to duck their filing obligations because the IRS has fewer resources to pursue non-compliant taxpayers.
As a tax controversy lawyer I frequently meet with taxpayers who have failed to file multiple years of returns. Many of those clients ask, “Should I file the return right now, or wait until I have the money to pay it?” The answer is simple: file it as soon as possible!
If the taxpayer has any money at all available for payment, it should be enclosed with the return. The reason for such advice is that one of the largest penalty rates which the IRS may impose is for late filing of a return. The penalty is five percent per month, up to a maximum of 25%, of the tax due but unpaid by the due date of the return. This works out to an annualized rate of 60%. Therefore, if one fails to file their return on time, the effective annual rate is over 75% when both interest and late filing and late payment penalties are considered. The late payment penalty after notice of intent to levy is one percent per month, or an effective rate of 12% per year in addition to statutory interest. In addition to the above considerations a taxpayer might also forfeit refunds due from delinquent returns since any return filed more than 3 years after its due date cannot receive a refund.
One drawback of filing a timely return without remittance is that the IRS will arrive at the taxpayer’s door to collect the liability much sooner than if he or she files a return late. However, the additional cost for penalties incurred to gain this time is prohibitive.
An additional consideration in advising the taxpayer to file returns, even if he or she does not have money to pay the balance of tax due, is the potential criminal penalties for failure to file a tax return. Therefore, if your client should fail to file a return, and if the Internal Revenue Service should decide that such action constituted willful failure to file, your client might be required to defend against a federal criminal charge.
The chances of prosecution for non-filing are small, but certain groups are targeted by the IRS. Politicians, tax protesters, drug dealers, organized crime figures and high income professionals are prime targets for IRS prosecution. The IRS uses prosecution for its deterrent effect on the general public, and these groups get larger headlines than the average guy on the street. Congress has allocated additional funds to the IRS to pursue drug dealers.