Unfiled Tax Returns / Failing to File Taxes for Several Years
If you haven’t filed your taxes for years, you may not have records necessary to file those taxes. The Law Office of Anthony N Verni can help you recreate those years of past tax returns, but you cannot wait any longer. Otherwise, you may experience negative consequences that we want to help you avoid.
When you work with us, we help you obtain the required documents, prepare the correct tax forms, file your returns, and pay what is owed, minimizing the financial impact on you. Moreover, we will find the right solution for you in case that you cannot afford to pay the owed amount in full.
Unfiled Income Tax Returns – Why Get Straight with the IRS?
Filing a U.S. income tax return is based upon a voluntarily system of compliance that assumes an individual will report his or her income accurately. It is also based upon the expectation that every individual should contribute to the system by paying his or her fair share of income tax. IRS intolerance towards delinquent taxpayers is based upon the assertion that those who fail to pay their fair share of income tax, unduly burden others who must make up the shortfall.
Delinquent taxpayers have advanced many reasons for failure to file, including: “paying taxes is for suckers,” “I didn’t know I had to file,” “there is no way I can pay my taxes,” “the IRS will never catch me since I work for myself” and many others. There are also those who fail to file federal income tax returns, citing the U. S. Constitution and other legal arguments as a basis for non-compliance.
These arguments have repeatedly failed. The U.S. Department of Justice, Tax Division’s regular prosecution and conviction of taxpayers who have advanced these arguments make clear that taking a frivolous tax position has serious consequences. Finally, there are those who are part of the “Shadow Economy.” This group of delinquent taxpayers have decided to try and game the system by dealing in cash, engaging in illegal income shifting schemes and/ or transferring their assets to a third party, all in an effort to avoid reporting their true income and to frustrate any IRS collection efforts.
Unfiled tax returns can affect an individual’s credit rating, impair a business owner’s ability to secure debt or equity financing, and result in the suspension of a professional license or revocation of a U.S. passport. Tax compliance failures can also result in collateral damage such as the foreclosure of employment opportunities, embarrassment, loss of reputation, family discord and stress related illness. For those new arrivals, a permanent legal resident, who fails to file his income tax returns will find it difficult, if not impossible, to obtain naturalization status. In certain cases a permanent legal resident may even be subject to deportation.
Achieving full compliance is an IRS priority. In this regard the IRS has a “Return Delinquency Program. “ Under the Program, IRS personnel are tasked with securing delinquent returns as well as collecting the full amount of tax due. Cases are generated using the Case Creation Non-filer Identification Program (CCNIP). The CCNIP identifies individual taxpayers from: (i) those who filed an individual tax return the previous year but failed to file a current return; and (ii) taxpayers whom the IRS received third party information program documents such as W-2 and Form 1099.
Where the IRS is unable to secure a taxpayer’s delinquent tax returns, the Agency may generate “Automated Substitute for Returns” (ASFR). An ASFR also referred to as a “Substitute Return” is generally used in situations where third parties report income received by the taxpayer during a particular year. Examples include wages from an employer as well as interest, dividends, gross proceeds received from stock sales and miscellaneous compensation. Substitute Returns also include mortgage interest but do not include legitimate business expenses,or potential tax credits. These items, including mortgage interest, are not considered in the calculation of income tax for purposes of generating an ASFR. In certain cases, these deductions and credits can significantly reduce a taxpayer’s overall tax liability, and in some cases, even result in a refund. Consequently, an ASFR can result in the overstatement of the taxpayer’s federal liability.
In cases where the IRS has access to third party information, such as wages, interest, dividends, gains, and miscellaneous income (Form 1099 Misc.), an assessment of a significant tax liability based upon a Substitute Return can result in the IRS filing a federal tax lien, the garnishment of a taxpayer’s wages or a levy on his financial accounts. In more serious cases the agent responsible for securing the delinquent returns may recommend a referral to the Criminal Investigation unit of the IRS.
Expatriates or U.S. taxpayers who maintain financial accounts overseas and fail to file federal income tax returns are particularly vulnerable and should also be concerned. The Foreign Asset Tax Compliance Act (FATCA) and the financial reporting requirements under the Bank Secrecy Act (FBAR) as well as the use of Qualified Intermediaries have facilitated the identification of delinquent filers by the IRS. FATCA disclosures also expose those expatriates or U.S. taxpayers who have filed U.S. income tax returns, but failed to report their foreign income or the existence of foreign financial assets on their U.S. tax returns, as well as those who have failed to meet their foreign financial asset reporting obligations.
Unfiled federal income tax returns are a serious matter. It is illegal and considered criminal. In addition to the imposition of civil penalties, delinquent non-filers can be subject to imprisonment for up to one year and a fine of up to $25,000 for each year of non-compliance. Delinquent taxpayers may also be subject to criminal sanctions associated with income tax evasion as well as non-tax crimes, such as defrauding the federal government, money laundering, etc.
Finally, the failure to file income tax returns can also result in prosecution by state tax authorities. In particular, New York and California have been active in this regard.
The starting point for dealing with delinquent tax returns is the acknowledgement that as a taxpayer you had an obligation to file a U.S. tax return(s), but failed to do so. Whether this epiphany is the result of your conscience or the receipt of a notice from the Internal Revenue Service, requesting you file your delinquent returns, how this moment of clarity came about should be of little concern to the delinquent taxpayer. It should, however, signal that it is time to take proactive steps towards coming into compliance.
Simple cases may involve filing delinquent tax returns and entering into an Installment Agreement for purposes of paying the outstanding tax liability. In other cases, it may be possible to enter into an Offer in Compromise, whereby the IRS agrees to accept an amount that is less than the face amount of the tax, penalties and interest in exchange for releasing the taxpayer from any further liability for tax years covered in the Offer. However, in the context of an Offer in Compromise, the failure to file tax returns may constitute a basis for rejecting the taxpayer’s Offer, particularly in cases where the taxpayer had the means to satisfy the tax liability in the years of non-compliance and failed to file returns, while at the same time living an extravagant lifestyle.
In addition to an Installment Agreement or Offer in Compromise, it may be possible to enter into a Partial Payment Plan or to be placed in “Uncollectible Status,” where the taxpayer can demonstrate financial hardship.
In cases where a taxpayer fails to file tax returns for multiple years, and such failure appears to be deliberate,and results in a substantial income tax liability, it may be advisable to consider a Domestic Voluntary Disclosure, as a means of avoiding potential criminal prosecution. A Domestic Voluntary Disclosure may be particularly relevant in cases, where a delinquent taxpayer’s failure to file was deliberate and where the taxpayer has systematically transferred his assets to a nominee entity, relative or trust with the intent of frustrating IRS collection efforts.
Some taxpayers maybe tempted to convey their assets to a relative, friend or shell company, in an effort to conceal assets from IRS detection. Liquidating these assets would enable the U.S. government to recoup some, if not all, of the tax due from the delinquent taxpayer. The transfer of a Taxpayer’s assets to a third party is considered fraudulent and will in all likelihood result in the filing of a federal tax lien against the transferee’s property. Often times these actions will conclude with a referral to the Criminal Investigation of the IRS. The landscape is littered with taxpayers who have tried and failed to “out Toyota” the IRS by attempting to place their assets beyond the government’s reach. It is also worthwhile noting that the sophistication and complexity in concealing these transfers can result in an “enhancement” during the sentencing process.
In cases involving expatriates or U.S. taxpayers who have either failed to file U.S. tax returns or filed but failed to report their offshore income and/or failed to report their foreign assets, resolution is also possible. In simple cases, it may be possible to utilize either the Foreign Offshore Streamlined or Domestic Offshore Streamlined Procedures. More difficult cases may require participation in the Offshore Voluntary Disclosure Program.
Other taxpayers will avoid dealing with their unfiled tax returns by pretending the problem doesn’t exist, only to discover that they are now subject to a federal tax lien or are the recipient of a wage garnishment or bank levy. A taxpayer who elects to disregard an IRS notice will eventually learn of a federal tax lien, wage garnishment or bank levy.
A decision to get straight with the IRS may require making certain adjustments to the taxpayer’s lifestyle and committing to a plan of action. A taxpayer needs to keep in mind; even though your spending may outpace your monthly income, any assertion that you are unable to pay the IRS will be evaluated in the context of the amounts provided for under the national standards. If your monthly expenses are out of line with the national standards, you may be forced to make some tough financial decisions.
Contrary to claims advanced during later night television ads, a payment plan with the IRS or an Offer in Compromise is not the result of a negotiation. Instead, any payment plan with the IRS or Offer will be based upon objective criteria, as well as prior dealings the taxpayer may have had with the IRS and the months remaining on the statute of limitations for collections.
The starting point for a delinquent taxpayer who is interested in coming into compliance with the IRS is acknowledging that they have a problem. As a delinquent taxpayer you should be focused on developing a strategy to get out of the hole rather than continuing to dig deeper. You also need to be realistic in accepting that the resolution process is not free and that engaging a tax professional is a necessity. You must also be willing to make certain financial sacrifices. The IRS is not in the business of subsidizing a taxpayer’s lifestyle. Unfortunately, for those who are unwilling to make these tough decisions, there is little hope.
It is erroneous to assume that there is no reason to file delinquent tax returns just because the statute of limitations has expired. It is risky to handle these matters on your own without the assistance of a tax attorney. As a general rule, those who directly contact the IRS for purposes of resolving their delinquent returns do not fare as well as taxpayers who are represented by a tax attorney. There have been cases where a taxpayer’s statement to an IRS agent has been used as a basis for criminal prosecution.
Don’t retain a tax resolution firm, certified public accountant or enrolled agent, without understanding the impact of such a decision.
Some delinquent taxpayers are tricked by television or radio ads that promise to settle their IRS tax debt “for pennies on the dollar.” The fact that a celebrity said it, doesn’t make it so. Not only are these claims exaggerated but in many cases simply untrue. Moreover, tax resolution companies may claim to have tax attorneys, certified public accountants and former IRS employees on staff. In certain cases, these claims have also turned out to be untrue. In fact, some tax resolution companies are nothing more than “boiler rooms” designed for the sole purpose of taking your hard earned money.
Instead of hiring a tax resolution firm, a taxpayer may decide to seek the advice of a certified public accountant or enrolled agent. This may not be the best solution for the following reasons: First, a certified public accountant or enrolled agent may not have the requisite experience or knowledge of the U.S. Tax laws necessary to bring about the resolution of a taxpayer’s compliance issues; Second, communications between a taxpayer and a certified public accountant or enrolled agent are not considered “privileged,” and as such, can result in unintended consequences to the taxpayer in the event the certified public accountant or enrolled agent is subpoenaed to testify or ordered to turn over documents containing confidential and potentially incriminating information.
For these reasons, a delinquent taxpayer should seek the advice of a tax attorney who is knowledgeable and experienced in tax compliance and resolution matters. A taxpayer, who is considering the cost of hiring a tax attorney versus handling the matter pro se, or hiring a tax resolution firm, certified public accountant or enrolled agent, should not make a decision based solely upon the cost of professional fees. Instead, a delinquent taxpayer should consider the total cost, including the risks associated with self representation or selecting someone who lacks the requisite knowledge and experience. Finally, a delinquent taxpayer should weigh the unintended consequences flowing from the disclosure of sensitive taxpayer information by a certified public accountant or enrolled agent.
Solutions exist for those with unfiled or delinquent tax returns. However, no one size solution fits all.
Tax compliance and resolution should be pursued with the assistance of a capable tax attorney. Any meaningful tax resolution strategy should include an evaluation of the specific facts of the case, the potential size of the tax deficiency, whether the failure to file was deliberate or the result of an honest oversight. Other considerations include the taxpayer’s lifestyle during the period of non-compliance as well as whether the taxpayer has taken any action to conceal assets from IRS detection, such as transferring the taxpayer’s assets to a shell corporation, relative or trust. After the taxpayer profile is developed, a tax attorney with the assistance of the taxpayer should discuss the various alternatives,as well as the respective risk and the cost associated with each alternative.
We can help you
The Law Office of Anthony N. Verni can help you with your unfiled tax returns. Our focus is on working with you to become compliant with the tax laws, and finding the best solution for you based on efficiency and transparency. We have over 20 years of experience and a high success rate. The longer you wait, the more complicated your situation may become. Don’t face the IRS alone, contact us.