Taxpayers are reluctant to file and pay taxes for a variety of reasons. Some taxpayers may believe that they do not earn enough to have to pay taxes. Other taxpayers may fear learning about their tax obligations and will continuously put off doing their taxes. Still other taxpayers may fail to file taxes simply because they have never done so before, and fear that filing for the first time will trigger an audit or other tax enforcement action by the IRS or a California state tax agency like the Franchise Tax Board FTB.
Failing to file taxes for one or more years is not a viable long-term strategy for dealing with taxes. For one, most taxpayers have an obligation to file both state and local taxes because the income filing thresholds are extremely modest. Furthermore, the IRS has implemented an array of computer systems programmed to detect instances of tax non-filing. Our Sacramento tax lawyers explain the possible consequences you may face if you have failed to file taxes in past years.
How Will the IRS Know That I Didn’t File My Taxes or Report Income?
Many people seem to believe that they can simply fail to file taxes with impunity. They may justify this mistaken belief on the basis of “not owing enough in tax for the IRS to notice” or other reasons. In reality, the IRS is able to keep close tabs on all workers and employers who generate a W-2 or 1099 income report.
This is because the IRS has implemented technological procedures that routinely search for discrepancies in what taxpayers report. These technologies are known as “form matching” and “information matching.” Form matching is the process through which IRS computer systems leverage the fact that both the employer and the employee will file a copy of a W-2, 1099, or another report of income. If the computer system detects that a report of income was generated and reported by the employer but not reported by the worker, then it is clear that the taxpayer has failed to file their taxes.
Information matching procedures allow the IRS to drill down to the next level of specificity in its tax enforcement efforts. Through information matching, the IRS’s computers will verify that the numbers you report are in accord with the numbers reported by your employer. If there is a discrepancy, the IRS may adjust your income or other claims. The IRS may also elect to launch a tax audit or engage in another enforcement option.
What Penalties Can I Face for a Failure to File Taxes?
If you fail to file your taxes you may be subject to multiple penalties. First, if you had an obligation to file taxes but did not, you are likely to face a failure to file penalty under Internal Revenue Code (IRC) § 6651(a)(1). Under the failure to file penalty, a taxpayer who fails to timely file their taxes can be assessed a penalty of five percent for any month or partial month where the tax remains unfiled. This penalty may be eliminated or mitigated, provided that the taxpayer is able to prove that the failure to file was reasonable and is not the product of “willful neglect.”
A taxpayer who failed to file taxes when he or she has an unsatisfied tax obligation can also face a failure to pay penalty under IRC 6651(a)(2). The failure to pay penalty will accrue at a rate of 0.5 percent a month or until the penalty reaches a maximum of 25 percent of the amount due. Furthermore, an additional penalty under IRC Section 6654 is possible when the taxpayer fails to pay taxes or underpays taxes on certain estates and trusts. Taxpayers who are required to make quarterly tax payments should do so to avoid the imposition of avoidable penalties.
Depending on your conduct surrounding the non-filing of taxes, the IRS may choose to seek other additional penalties. Furthermore, taxpayers should also consider the fact that interest will accrue on all taxes that are due and owing. The failure to file and pay taxes for even a few years can result in a significant back taxes.
Work with Strategic Sacramento Tax Lawyers When Fixing Unfiled Taxes
If you are concerned about past failures to file taxes, the Sacramento tax attorneys of NewPoint Law Group may be able to help. Even if your failure to file does result in a new tax burden, we can explore tax relief strategies like the Offer in Compromise Program to reduce the amount of taxes you owe. To discuss how we may be able to assist with your tax concerns, please call our Roseville law office at 1-800-358-0305 today.