A few important items about unfiled and past-due tax returns:
- Taxpayers with a filing requirement need to file an accurate annual tax return by the filing deadline. Not filing can cause serious IRS enforcement actions, including civil and criminal investigations.
- The penalties for late filing can be substantial, but can be forgiven, or abated, under first-time penalty abatement or for reasonable cause.
- For individual returns, failure to file penalties apply only if your return shows that you owe taxes. However, the penalties can be significant: 5% of the tax you owe, per month, up to 25%. The civil fraudulent failure to file penalty is 15% per month, up to 75% of the tax you owe.
- You can request relief from late-filing penalties for one year if you have a clean compliance history for the past three years, using the IRS first-time penalty abatement waiver. If you don’t qualify for first-time abatement, you can request relief if you can show that you had unforeseen circumstances outside of your control that caused the late filing (reasonable cause argument).
- Taxpayers with a late-filed return may also be subject to a failure-to-pay penalty (.05% of the tax owed per month, up to 25%). When combined with the failure to file penalty, the two penalties can reach a maximum of 47.5% of the taxes you owed.
- For individuals, the IRS usually requires only that you file returns for the past six tax years to be in compliance. IRS Policy Statement 5-133 explains that the IRS enforcement period is generally six years.
- The IRS can deviate from the six-year policy if it believes you will owe significant amounts in years prior to the past six tax years, if you are filing a business return, or if you have a history of not following tax rules. Normally, the IRS deviates from the policy when taxpayers are assigned to IRS field collection (i.e., a revenue officer is assigned to their case) or if you are a business.
- IRS transcripts can help you file an accurate past-due return. The IRS can provide your wage and income transcripts by year, as well as account transcripts to show any payments or credits.
- If you don’t file a return, the IRS can file one for you – and you will owe taxes, penalties, and interest. This return is called a substitute for return (SFR). The IRS will prepare and process a return that includes only your income and withholdings – no deductions, preferred filing status, or credits. You can use special procedures to file an original return to replace the SFR return.
- The IRS can freeze future refunds. If you don’t file a required return, you can face IRS refund freezes on returns you file in future years.
If you file late, you may have to use special IRS procedures to file your return. - Special procedures can include matching your return to IRS income records or filing your return directly with an IRS enforcement function (Collection, Audit, etc).
- Late filing is enforced by IRS Collection employees. These investigations are called taxpayer delinquency investigations or return delinquency investigations.
- IRS Collection employees (revenue officers and Automated Collection staff) are responsible for pursuing non-filers. However, all IRS enforcement personnel (Audit, Collection, etc.) can pursue enforcement against a non-filer.