People fail to file tax returns for a variety of reasons -- personal or business problems; feelings of hopelessness or fear due to an extended period of nonfiling; anti-government sentiments; or beliefs that the penalty will not outweigh the expense and trouble of filing. Because the U.S. tax system is based on taxpayers willingly honoring their obligations, the Internal Revenue Service (IRS) does what it can to encourage nonfilers to voluntarily come forward after a period of not paying taxes. Part of this strategy includes taking a voluntary disclosure into consideration when determining whether to criminally prosecute, negotiating payment installment plans, and reducing tax liability for certain needy individuals.
Whatever your reason for not filing, you may want to consider the following information in order to be prepared for actions that may be taken against you.
Tax Evasion Basics
Knowingly declining to file a tax return, or refusal to pay what is owed after filing a return, can be a criminal violation of the law commonly referred to as "tax evasion." You may have heard about notorious gangsters like Al Capone being convicted of tax evasion, which is often used against those who operate illegal enterprises. But anyone who refuses to file a tax return or pay taxes may be charged with this serious crime.
Keep in mind, however, that it's not the policy of the IRS to prosecute ordinary people who make simple mistakes or whose returns were lost in the mail. It's a question of intent; and although the IRS reserves the right to prosecute those who don't file or pay taxes, they tend to encourage those individuals to come forward voluntarily or work out a payment plan instead of filing charges. The bottom line is that if you cooperate, you're less likely to be prosecuted.
When Failure to Pay Taxes Becomes a Crime
As stated earlier, failure to pay taxes or file a return is itself a crime. However, the IRS would rather work with you and reach a settlement before seeking criminal charges. If you derive your income from illegal sources, it is more likely that the IRS will recommend prosecution (and further investigation into illegally obtained income could also result in fraud or racketeering charges). The more blatantly fraudulent your behavior has been, the more likely the IRS is to prosecute you. For example, you would likely be prosecuted for failing to file returns year after year, despite repeated contacts by the IRS.
In order to convict you of a tax crime, the IRS does not have to prove the exact amount you owe. But such charges most often come after the agency conducts an audit of your income and financial situation. Sometimes they're filed after a tax collector detects evasion or fraud. In any event; if the IRS suspects criminal nonpayment (or underpayment) of taxes, it will start with a "primary investigation" to determine whether criminal charges should indeed be filed. If the case progresses, the IRS will initiatiate a "subject criminal investigation."
The special agent in charge of a particular investigation will work closely with IRS legal counsel to ensure it's following protocol and properly identifying the legal issues involved. Finally, the IRS will refer the case to the Justice Department's Tax Division.
What to Expect if You Don't Pay Your Taxes: Non-Criminal Actions
The IRS has a general policy of not enforcing the filing of returns older than six years, although the IRS may request older records if an audit suggests the need for more data. Generally, the IRS can collect taxes, interest, and penalties for all of the taxes you have owed over the years and has programs in place to identify nonfilers. Keep in mind that the filing of a return starts the audit and collection time limits, or statutes of limitation.
If you do owe taxes, you can probably work out an installment plan to pay off your debt. You also may be able to negotiate a settlement with the IRS, depending on your ability to pay, that will significantly diminish your overall tax debt. In some cases, the IRS may owe you money.
If you go to a tax professional, you will probably not have to deal directly with the IRS. A tax professional should be able to obtain your past W-2s, 1099s, and 1098s from the IRS if you no longer have them. The IRS may accept reasonable estimates of charitable contributions, medical expenses, and other deductions. Depending on how complicated your situation and how good your record keeping is, the entire process of clearing up your nonfiling status could take as little as a few weeks.
Didn't Pay Your Taxes? Get a Free Initial Review of Your Situation
Now that you have a pretty good idea of what to expect if you don't pay your taxes, you'll probably want to do what's necessary to avoid the consequences. In some cases, simply coming to the table and expressing a willingness to work out a plan will prevent legal action against you. Find out more by having a local tax attorney assess your situation for free.