Unfiled tax returns. IRS consequences of filing late or never filing
Taxpayers oftentimes think that if they cannot pay the tax debt owed, this excuses them from filing a tax return. This assumption will prove to be costly because if they are late filing their taxes or have unfiled tax returns, they may be liable to penalties by the IRS. Always make a timely IRS filing, even if the full payment cannot be met.
Avoiding penalties from late tax return filings.
If a late filing occurs, there are two types of penalties that may apply: failure-to-file penalty and failure-to-pay. Usually the failure-to-file penalty will be costlier than the failure-to-pay, so it is in the taxpayer’s best interest to file timely and pay down as much of the tax debt as possible.
Once the tax return is processed, the taxpayer must call the IRS to resolve the tax debt through their many resolution options, such as a payment plan or offer in compromise. Do not ignore the IRS when they try to collect on the unpaid tax debt. Not cooperating fully may result in a wage garnishment, bank levy and tax lien applied against the taxpayer.
Unfiled Tax returns and Failure-to-file penalty.
This penalty amounts to approximately 5 percent of the unpaid taxes for each month that it is late. It may not exceed 25 percent of the unpaid taxes. If the taxpayer files their return more than 60 days after the due date or extended due date, the minimum penalty will either be $135 or 100 percent of the unpaid tax, whichever is the smaller amount.
What is the Failure-to-pay penalty?
If the taxpayer is late paying the tax debt due for any given tax year, the IRS will charge a failure-to-pay penalty of ½ of 1 percent of the unpaid taxes for each month after the deadline that the taxes are unpaid. This penalty can be as much as 25 percent of the unpaid taxes.
Exceptions to filing penalties
Taxpayers may have many reasons why they could not file their taxes in order to avoid the penalties. Unfortunately, in many cases it is too late to argue them with the IRS due to the passage of time. It is quite common for a taxpayer to fail to file for one year and continue to not do so for many years thereafter. The excuses will not be accepted later after that third or fourth unfiled tax return.
That is why it is so important to address tax issues as soon as the taxpayer has knowledge about them and prepare for the consequences of an untimely filing, missing a filing and/or not paying off the tax debts. The taxpayer should be aware of some reasonable explanations or exceptions to late filing penalties when they call in to the IRS to effectively argue why they should be removed for filing late or not paying on time. IRS penalty abatement relief is generally granted when a taxpayer exercised “ordinary business care and prudence” but still failed to comply.
Reasonable excuses for removal of penalties: penalty abatement
• Taxpayer suffered with health problems where their illness made them suffer with memory loss and concentration problems.
• Taxpayer suffered from the death of a close family member
• Taxpayer’s house was burglarized where all documents needed to prepare returns were stolen.
Unreasonable excuses for removal of penalties
• Taxpayer’s CPA or tax return preparer failed to timely file the tax return. This excuse is not allowed because a taxpayer always has the ultimate burden in ensuring the filing of their tax returns.
• Taxpayer ignorance. For example, a taxpayer cannot claim that they did not know that winnings from gambling is not considered income or that they were unsure about when their tax return was due.
• Taxpayers religious beliefs are not an excuse for avoiding income from being taxable.
First time penalty abatement waiver.
There is another option to remove penalties that most taxpayers do not know about, which requires no excuse: the first-time penalty abatement waiver. Taxpayer may qualify if:
• Taxpayer did not previously have to file a return or had no penalties for the 3 tax years prior to the tax year in which they received a penalty.
• Taxpayer has filed all currently required returns or filed an extension of time to file.
• Taxpayer has paid, or arranged to pay, any tax due.
The first time penalty abatement waiver may only be used for the first year of the offense, unless there is a reasonable excuse for not filing or paying on time for a second year.
It may be difficult to take on the IRS alone, consider hiring a tax attorney for assistance with the entire process. The Los Angeles tax attorney is a guide through the many issues of why the taxpayer was unable to timely file and or pay on time. Tax attorneys will ensure you receive the best chance at penalty abatement with the IRS.
Please call for a no-cost tax attorney consultation at 310-494-0100 .
This blog post on Unfiled Tax Returns is not intended as legal advice and should be considered general information only.