You spent the past several years toiling away at work and/or dealing with problems in life and, for whatever reason, you not only didn’t get around to paying your federal taxes, but you also didn’t file your tax returns. Maybe you missed one or two years because an employer neglected to send you a W-2 (or a 1099 if you are an independent contractor). Maybe you had an unusual income situation and did not know how to handle it. Maybe you forgot. Maybe you missed a year or two, got frightened of the consequences, and then continued to “forget” to file in the hopes that the IRS may return the favor, and “forget” about you.
Regardless of the reason, it is incredibly unlikely that the IRS will simply ignore the fact that you did not file a tax return for a given year or years. Usually, in fact, the IRS begins sending notices within months of the date your delinquent return was due. In this article, I will outline the possible steps the IRS can take if you fail to file a tax return for yourself, or your business. I will describe how the process usually unfolds, and lastly, I will tell you what you can do about it.
Failing to file personal income tax returns
If you fail to file your income tax return by April 15th, you are not alone. While about 150 million individual income tax returns were filed in 2021, at least 7 million taxpayers fail to file each year. As I noted above, the reasons for this are plentiful and various. Perhaps most frequently, clients I work with will express a reluctance to file because they do not have the ability to pay what they owe. Ironically, this results in a taxpayer having a much higher obligation to the federal government, putting them in more dire straits. The IRS charges huge penalties for any failure to file income tax returns, beginning at 5% in the first month, and increasing by 5% per month until it reaches a cap of 25%. In other words, if you owe $10,000 on your tax return that you should have filed, the amount you owe will increase by $500 for every month (or part of a month) that goes by without your return being filed. Thus, your $10,000 tax liability quickly jumps to $12,500, and that does not include failure to pay penalties and interest. Factor those into the equation, and your predicament is substantially worse.
What is my advice if you have delinquent returns, and you do not have the money to pay the tax owed? File them anyway! Ask yourself this question: If I cannot pay the current tax liability, can I pay the current tax liability, plus 25% more, plus the interest on that 25%? We both know the answer to this. If you cannot pay what you owe, an Installment Agreement or Offer in Compromise is a possible solution that will allow you to meet your monthly bills and back-taxes. (These programs can be especially beneficial if you have a good attorney assisting you with the OIC, or the Installment Agreement proposal process, so you won’t get burned with higher-than-necessary payments or settlement amounts.)
Another good reason to file your tax returns is that the IRS is always ready and willing to file your tax returns for you. It is very likely that the IRS knows what you earned last year. Your employer issues a W-2 to you and the Social Security Administration, which communicates with the IRS. Even if you receive self-employment income in the form of a 1099, the IRS eventually receives a copy of that, too. Just because you don’t file a tax return does not mean the IRS won’t find out what you earned.
What the IRS doesn’t know is what kind of tax exemptions and deductions you may be entitled to. If you have deductible mortgage interest, 3 kids, and a bevy of medical bills you paid last year, the IRS will not give you credit for any of it if they file a tax return on your behalf. They will simply file the return with a standard deduction, and they may not even give you a marriage tax break (the IRS can legally declare you “married filing separate” or simply file you as single). This results in an inflated tax liability that is likely far higher than what you would owe even if you filed your tax return 6 months late. In other words, there is almost never a good reason not to file.
Business tax returns
A good fifty percent of my clients are businesses, and when you are in business for yourself, failing to file a tax return can have even more far-reaching consequences. First, unlike most individuals, businesses have a variety of tax returns they are responsible for filing. The most common return a business with employees will file is a Form 941, or quarterly tax return for reporting wages paid, taxes withheld, and the employer’s matching contributions to the employee’s Medicare and Social Security contributions.
Because the business owner is responsible for issuing W-2s to the government, if they fail to file the W-2s and they fail to file the Form 941, the IRS does not have a very good idea what wages the employer pays. Still, the IRS has the legal authority (under Internal Revenue Code Section 6020-B) to file those 941s on behalf of an employer anyway. And when the IRS “estimates” the tax owed on a Form 941, they always depart upward from the actual tax you might owe. I have seen business taxpayers face tax liabilities that are up to ten times the amount they would owe if they filed the returns themselves.
Not only can the IRS estimate (wildly) the tax a business owes, but – as with individuals – the IRS can then lawfully collect that fictitious balance from the business through forcible means. The IRS can levy bank accounts, levy accounts receivable, levy insurance companies (in the case of an auto repair shop or medical office), seize assets, and even “tap the till” of a cash business, such as a restaurant or gas station, to collect what’s owed. Simply put, if your business is not in filing compliance, you need help, fast. And not just the help of a tax accountant; you need someone to monitor the behavior of the IRS Collections Department so you will still have a business to run once your returns are filed.
What if I already owe money to the IRS?
If you already have a back-tax balance, then the pressure to file your missing returns is actually far greater. Taxpayers are not eligible for either an Offer in Compromise, or an Installment Agreement, if they are not in full filing compliance. This does not give you a lot of options to prevent a Revenue Officer (tax collector) from forcibly collecting the fictitious balance they say you owe.
This can be especially troublesome if you do not have access – or have delayed access—to the information you need to properly file a delinquent return. In such a situation, you may be a sitting duck for a bank or wage levy, powerless to prevent enforcement action by getting an IRS agent to agree to a payment plan or Offer in Compromise.
In cases like these, it can be well worth the fee to hire an attorney to represent you or your business. There is an enormous well of strategies at the ready grasp of a qualified tax attorney when it comes to delaying enforcement action. From filing a Collection Due Process Hearing request, to filing a Collection Appeal, to simply negotiating a short-term deal with a Revenue Officer to prevent enforcement until the client can file the delinquent tax returns, a good attorney can be the difference between a temporary inconvenience, and financial ruin.
Finally, if you are suffering a true financial hardship, and you have missing tax returns, there are options that may not be available to the more well-heeled taxpayer with delinquent filings. There have been U.S. Tax Court decisions that codify the right of taxpayers to be left alone if they cannot pay and have not filed – even if the delinquent filings go back years. Again, a qualified tax attorney can help you navigate this process, and the cost may not be as steep as you think. Even if you have to borrow money for a fee from family or friends, a good attorney can get the IRS off your back for years, regardless of your filing compliance issues, especially if you have no ability to pay the IRS.
Is there ever a good reason not to file my delinquent tax returns?
The short answer to this is “no.” A more complex answer might take into account some very limited circumstances where letting the IRS file tax returns on your behalf could be beneficial. For example, if you owe the IRS a lot of money, but you have just enough assets and/or income that you do not qualify for an Offer in Compromise, then a higher tax liability just might benefit you. As I noted above, frequently the IRS will file tax returns on your behalf with inflated, fictitious tax liabilities. Perhaps John Q. Taxpayer owes $100,000 to the IRS based on returns he actually filed, but he has $50,000 in equity in his home, and could afford monthly payments of $500 per month based on his income. The IRS sees John as a good bet to full-pay his debt within the statute of limitations of 10 years. In that case, the IRS will usually decide not to settle. (The IRS refers this as a rejection on the basis of the Offer not being in the “best interests of the government.”)
On the other hand, Suzy Q. Taxpayer may have the same equity in her home, and roughly the same income, but owe $300,000 to the IRS, because the IRS filed her 2010 through 2020 tax returns on her behalf while utilizing none of the deductions or exemptions to which Suzy may be entitled. In that case, Suzy could very well be an Offer candidate, and settle for less than $100,000 due to a quirk in the OIC formula that would require the IRS to multiply her $500 in excess income by 12, rather than by 120 (the number of months the IRS has to collect a tax debt before it becomes legally uncollectible).
This is a pretty big gamble, however. First of all, it is unlikely the IRS would wait 10 years to file all of Suzy’s tax returns all at once. Second, it is far more likely the IRS would issue bank levies, wage levies, and other forms of enforcement action to collect a good chunk of that $300,000 before Suzy puts together an Offer in Compromise (especially because she will not be eligible for an Offer unless the IRS files all of her returns).
Whether your case more resembles Suzy’s or John’s, however, it is always a good idea to have an experienced tax attorney review your case and chart out the right path. An attorney with substantial experience resolving tax liabilities can minimize or eliminate the chances of enforced collections (levied bank accounts, garnished wages, seized assets, etc.), defend your rights as a taxpayer, and negotiate the best terms for which you are eligible by law. This can translate into saving of thousands or tens of thousands of dollars as well as the avoidance of financial crises (it is not easy to pay the mortgage or rent, or to put food on the table when the IRS has frozen your bank account).
Fortress Tax Relief has caring and knowledgeable professionals on staff who can answer your questions and outline a solution tailored to your specific needs. There is no cost for a telephone consultation, so pick up the phone and give us a call.