Individuals who choose not to file their tax returns (“Unfiled Returns”) will be located by the Internal Revenue Service, but it will take time. Individuals may choose not to file their income tax returns with the IRS or New York State for many reasons, not limited to; not being able to pay tax debts owed, they believe paying taxes is voluntary, or just deciding not to. No matter what the reason for non-filing is, the IRS will want any back tax debts owed.
Non-filing and Unfiled Returns in general, can be a crime when back taxes are owed. It can result in penalties, fines, and the possibility of prison. The first step to solve this tax problem is to file any unfiled returns. This needs to be done even if you are unable to pay for the tax debt owed, as well as fees and interest that might be added to the debt. If you are due a refund, you may only receive the money for the previous three years. After the three year window, any refunds you may be owed will not be awarded in reducing your back tax debt liability.
Depending on each individual case, the consequences for non-filing vary. However, in most cases non-filers who take action by filing returns and paying back any taxes owed will no longer have the IRS criminal process after them.
For individuals who do not file and have unfiled returns, the IRS will first file a substitute return for you. This return will be based solely on information the IRS has received from other sources, such as wage information you employer reported to the IRS or mortgage interest reported to the IRS by your bank. A substitute return will not include any exemptions or expenses, and this return will likely overstate the real tax liability by a large amount. Once the tax liability is calculated, the IRS will start the collection process. This can escalate to placing a levy on your wages or assets, or filing a tax lien against your property.
Tax Tips for Non-Filers and Unfiled returns
Even if the IRS has already filed a substitute return for you when you have unfiled returns, you still have the ability to file your own tax return. By filing your own return, you are able to take advantage of deductions, exemptions and credits that are applicable to you. Generally, the IRS accepts your adjustments and will reflect the correct figures for your case in their accounts.
Non-filers who decide to file tax returns should consider seeking professional advice from a tax attorney. An experienced tax attorney can help with the process of filing returns and represent the individual to the IRS and state. If you choose to meet with an experienced tax attorney, you will want to bring as much tax documentation that you have. This will include any W-2s, Form 1099, capital gains or losses, receipts for expenses, and social security numbers and date of births for you and any dependents.
Taxpayers who continue to not file returns, or fail to respond the attempts made by the IRS for communications can face strong enforcement actions. If taxpayers continue non-compliance, there is the possibility for additional penalties or criminal prosecution for people with unfiled returns.
Tips to avoid Tax Crimes
Taxpayers who file their returns and pay the amount due have done a lot in avoiding a tax crime. Once a return is filed, even if it contains errors, the burden of proof is on the Internal Revenue Service to prove any criminal wrongdoing.
According to a recent report, even with fewer staff members and an increase in budget cuts, the IRS has investigated more tax fraud and tax evasion cases and has convicted more tax criminals in recent years. In 2012, the agency investigated 400 more tax cases and made 300 more tax convictions than 2011, and did so with 8 percent less staff. The IRS works to stop tax fraud, tax evasion, identity theft, and money laundering.
The IRS Criminal Investigation charges are often linked to other non-tax crimes. The IRS works with other government agencies to investigate drugs and fraud. However, only the IRS has the power to investigate criminal tax violations of the tax code.
However, the IRS does not want to put tax payers in jail. When a case reaches the criminal investigation level, it is the final option. Criminal investigations can be effective, but they are also very costly and time consuming.
The following are tips that can reduce taxpayer chances of committing tax crimes:
1. File: The most important action done by a taxpayer to avoid criminal prosecution is to file their tax return. Though it might seem obvious, some taxpayers do not file returns annually. This might happen if the taxpayer cannot afford the tax liability, or chooses to not pay. The IRS wants to collect on taxes owed and criminal investigations are easily initiated when a taxpayer does not pay back taxes, refuses to pay back taxes, or does not file. Sometimes nonpayment can be validated, such as when the taxpayer does not have the funds available to make a payment. However, if resources are available, not filing and not making payments only worsen the situation from a criminal perspective.
2. Respond to IRS Letters: The IRS is known for being aggressive in sending letters and leaving messages with taxpayers who they want to be in contact with. IRS letters and messages should not be ignored. Whether they choose to audit you or want additional information, the taxpayer should respond. Correspondence does not mean that you are under criminal investigation, and failing to respond usually does not benefit the taxpayer. If the IRS is in contact with you, it is best to work with the agency through a tax attorney.
3. Work with tax auditors: When a civil auditor suspects possible fraud, they turn the case over to the criminal investigators in the IRS. Once an agent starts to look into a cause for the possibility of tax crimes, they will also request information and documents. The taxpayer should cooperate and work with tax auditors, but also through a tax lawyer.
4. Hold onto records: Keeping complete and accurate records is the best way to prove your tax returns are accurate. For instance, if you report $75,000 in sales to your state for sales tax, the IRS will also want these numbers reported, and with documentation, on the income tax returns. The IRS and State Tax Departments exchange information and look for inconsistencies. The numbers you report should be able to be proven with records, especially for a criminal investigation. Once a criminal investigation is initiated, the IRS agent will work on gathering facts and evidence. Keeping your tax records and tax returns for longer than the three year is recommend since it is a proactive way to prove your returns are accurate.
5. Hire representation: After a criminal investigation starts or seems possible, and evidence is collected, an IRS special agent will decide whether or not to recommend prosecution. The case will be referred to the Department of Justice, Tax Division, or to the taxpayers District Attorney if a state tax issue. You should work with an experienced New York tax lawyer before the case escalates to this level. Along the audit there are opportunities to work with the IRS special agent, and many times taxpayers believe that they are answering questions correctly and providing the proper information, but without the experience of a tax attorney, taxpayers often make the situation more difficult. By working with someone who understands tax code and the audit process, taxpayers can be better equipped.
Though it can be easy to decide that since the burden of proof is on the IRS to prove tax crimes, it is important to remember the IRS is an agency that has a lot of power and resources. By filing your taxes every year, and doing your best to pay back any tax liabilities owed, you reduce your chances for a criminal tax audit or criminal indictment.