People do not file their tax return on time for many reasons: some are general malingerers who procrastinate with everything in life; some are disorganized people who endlessly claim to be working on getting tax information together but never do; some know they will owe tax and believe not filing is better than filing and not paying because IRS bloodhounds won’t sniff our their trail as quickly; some are oblivious, too preoccupied with life and actually forget to file; and, some simply are tax criminals who never intend to file. Whatever the motive, not filing a tax return or filing late has consequences, some of which are:
- Allowing IRS more time within which to assess tax. Normally, IRS has three years from the due date of a return to examine the return, propose adjustments and assess more tax on a taxpayer. Not filing means the time period (statute of limitations) does not start running. So, IRS has all the time in the world to locate the delinquent taxpayer and assess whatever tax it determines from information in its computers.
- When tax is assessed on a late filed return, a failure to file penalty (FTF) is also assessed. The penalty maxes out at 25% of the tax owed but reaches the maximum quickly because it is assessed at the rate of 5% per month or part thereof. Contrariwise, filing and not paying results in a failure to pay (FTP) penalty being assessed at the rate of only 1/2 percent per month. The FTP penalty also maxes out at 25% (yet cannot duplicate the FTF penalty) but takes much longer to reach the maximum amount.
- Potential criminal violation for wilful failure to file a return under section 7203. Although a misdemeanor violation, the maximum sentence can be on year in prison and/ or a fine of $250,000. Wilful has the same meaning as under the negligence penalty provisions, i.e., an intentional violation of a known legal duty, but a higher “beyond a reasonable doubt” standard of proof.
- Elections may be forgone: Elections must generally be made in a timely filed return. IRS has administrative relief provisions in Treasury Regulations 301-9101 through 9103, but approval for many untimely made elections requires a showing that one acted reasonably and in good faith and that granting of relief will not prejudice the government such as by lowering one’s tax liability.
- Taxes assessed before a return is filed are not dischargeable in bankruptcy. Under Bankruptcy Code Section 523(a) a return for this purpose does not include a substitute return prepared by IRS under Section 6020(b). If the taxpayer later files a return reporting a higher tax than was shown as owing on the 6020(b) return, however, the additional tax liability will be dischargeable. See IRS Chief Counsel Notice CC-2010-013 (9/2/2010).
Thus, a poetic word to the wise for remembering:
- If you want to hold that smile
- You are wearing for a while
- Let not foolishness beguile
- Be smart and timely file.
Copyright 2011 by Robert S. Steinberg/ All rights reserved.