Welcome to TaxBlawg, a resource from Chamberlain Hrdlicka for news and analysis of current legal issues facing tax practitioners. Although blawg.com identifies nearly 1,400 active “blawgs,” including 20+ blawgs related to taxation and estate planning, the needs of tax professionals have received surprisingly little attention.
The Wall Street Journal's Tax Blog gives “tips and advice for filers,” and Paul Caron’s legendary TaxProf Blog is an excellent clearinghouse for academic and policy-oriented news. Yet, tax practitioners still lack a dedicated resource to call their own. For those intrepid souls, we offer TaxBlawg, a forum of tax talk for tax pros.
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Well for starters, the IRS won’t be very happy! Beyond that, the IRS has several avenues it can pursue.
In extreme situations, such as where a taxpayer owes a considerable sum of money and has not filed for several years, the IRS may consider pursuing criminal liability under I.R.C. § 7203, which makes it a misdemeanor to “willfully” fail to file a Federal Income Tax Return. This is rarely applied unless a pattern of three consecutive non-filing years are present, but potentially any single willful failure to file could result in this prosecution. There is a six-year statue of limitations, which begins to run on the day each tax return is due, so that the IRS has plenty of time to conduct an investigation.
Above and beyond the criminal liabilities, there can be civil liability for taxes, interest and penalties. The presence of a criminal investigation is not a prerequisite to such a civil proceeding, nor is it barred in the event a criminal prosecution is pursued. In fact, most non-filer situations are pursued civilly.
The IRS is authorized by I.R.C. § 6020(b) to prepare a return for a taxpayer in the event one is not filed. The information used could be the subject of information returns—Forms 1099 and W-2; formal examination of the taxpayer’s records; information from third parties; and in some cases even situations where the IRS relies upon information from prior years’ tax returns.
The taxpayer should be aware that the IRS seldom does this in isolation. It is normal for the IRS to send a letter to the taxpayer stating that its records show that no tax return has been filed, and asking the taxpayer to send a copy if one was in fact filed, but alternatively to file one as soon as possible. When the taxpayer does not respond, the IRS either conducts an examination or simply handles it by correspondence. In the absence of a formal agreement by the taxpayer to what the IRS has computed the liability and its components to be, the IRS cannot simply “assess” the liability. It will issue a Notice of Deficiency outlining the details of its adjustments and computations. When that has happened, the Taxpayer who disagrees with the result must file a case in the U.S. Tax Court to prevent the IRS from assessing the liability and proceeding to collect it.
One serious handicap in cases where taxpayers do not participate in either the correspondence or personal audits is that the IRS is undoubtedly not going to allow any deductions, since none are proven, and will treat any receipts reflected on a Form 1099 or 1099 substitute as ordinary income. In many cases, such items from brokerage houses include gross receipts from the disposition of securities or other assets, but do not reflect the taxpayer’s basis, holding period, or other information which might affect the amount taxable, and the proper tax treatment.
On top of the foregoing, there are penalties based upon late filing in and of itself. I.R.C. § 6651(a)(1) provides for a penalty running at the rate of 5% for each month or part of a month that a return is delinquent, maxing out at 25% of the underpayment of tax. However, if the IRS concludes that the failure to file the return was fraudulent, I.R.C. § 6651(h) provides for an enhanced penalty of 75% of the underpayment.
As busy as we all are, it is important to take whatever steps are possible to get your tax returns filed on time, and to understand that if you fail to do so, it is only a matter of time before the IRS arrives and proceeds as we have described. The longer one waits, the worse the ultimate result can be.