TAX RETURNS - FAILURE TO FILE

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

Many people fail to file Individual Income Tax Returns for a variety of reasons. Some reasons are innocent, although the most common is the understandable desire of people not to pay tax if they can get away with it.

We have heard many reasons why people fall behind. They may be seriously ill or unable to pay their tax liability.

Then it becomes difficult to get back into the system. "I filed for 1988. I couldn't pay for 1989, so I did not file. Then I was afraid to file for 1990. I haven't filed since then. What can I do now?"

Failure to file Income Tax Returns is a criminal offense. However, no one who has voluntarily filed back returns before being caught has ever been criminally prosecuted. That is the first key: filing BEFORE they catch you.

If the IRS catches a non-filer, criminal prosecution is likely only if the person is a high profile publicity bonanza for the IRS.

If the non-filer is a car mechanic, putting him in jail accomplishes little for society. It has no publicity value; it costs money to prosecute and jail him; his family goes on welfare.

However, if the non-filer is a doctor, lawyer, politician, sports figure, or entertainer, criminal prosecution is a publicity bonanza for the IRS to scare other people.

How can people get away with not filing?

It is difficult for most people. Taxes are withheld from employees and W-2s are issued; interest, dividends, stock sales, and real estate sales are reported to IRS on magnetic computer tape.

IRS computers track these items and compare what is reported on individuals' tax returns. The computers audit you automatically if any discrepancy appears.

There are two main categories of non-filers:

Many people are paid "under the table," have no interest or dividends, and do not own a house. They can get away without filing, for a while.

Self-employed independent contractors, such as skilled tradesmen and salespeople (such as real estate agents) pay two kinds of tax: regular income tax, PLUS self-employment tax (an extra 15% for Social Security). This extra tax makes many independent contractors reluctant to file.

However, non-filing has its price. When you are caught, interest and penalties may easily double the debt. The later you file, the more difficult it is to accurately report income and deductions. And, it is likely the IRS will not believe deductions which would not have been audited if you had filed on time.

Times are tough. The government needs money. New programs to catch non-filers are being tested and implemented. Most people are wholly in favor of making non-filers pay.

Non-Filers Alert

As always, it is better to come forward with back tax returns, rather than wait for the IRS or FTB to knock on your door.

California has added some new penalties and costs for non-filers who do not respond for demanded tax returns. First, the penalty may be up to 50% of the gross tax due. [This is NOT based on the net tax after prepayments. For example, if total tax is $100, and $120 was withheld, a refund of $20 is due. But the penalty is $50, based on tax before credits.]

This is different from the Federal rules where penalties are based on the net of tax due.

New legislation will also pass on additional California costs to non-filers and non-payers.