Very few people look forward to filing their income tax returns, but putting off this dreaded chore can lead to severe consequences that range from losing a refund to spending time behind bars. This article will cover what could happen if you don’t submit a tax return, explain that ignoring the Internal Revenue Service is not a wise strategy and answer questions you may have about tax audits.
Four Things You Need to Know If You Have Unfiled Tax Returns
Neglecting to file a tax return will not make financial problems go away, but it could make matters worse. Here are four things you should know if you have unfiled tax returns or are thinking about not filing:
- You are committing a crime: Some people refuse to file tax returns because they believe income taxes are unconstitutional. The problem is that the government and courts do not share this view. Failing to file a tax return is a criminal offense that carries a penalty of one year in jail for each unfiled return, and there is no parole in the federal criminal justice system. The actor Wesley Snipes chose to test the government on this issue, and he was sentenced to three years in a federal prison for intentionally not filing tax returns between 1999 and 2001.
- The IRS could File a return for you: If you do not file a tax return, the IRS could file what is known as a substitute for return using information provided by your employer and bank. This is something that should be avoided at all costs because the agency will not give you any deductions or exemptions and charge you the maximum amount of tax possible. Filing a return after the IRS has compiled an SFR for you will get back your deductions and exemptions and lower your tax liability, but it could also lead to more scrutiny.
- You could lose a refund: You will not be able to claim a refund on taxes paid more than three years ago if you did not submit a return. The IRS could also hold a refund that you are entitled to if it believes you owe money from a year when you did not submit a return.
- You could face levies and seizures: Not complying with the nation’s tax laws gives the IRS the authority to take action to collect unpaid taxes. These steps could range from placing a levy on your wages to seizing money from your bank account.
The Statute of Limitations for Unfiled Taxes
Statutes of limitations place time limits on how long individuals can be held responsible for criminal offenses, but there is no statute of limitations for failing to file tax returns. This means that the IRS can in theory go back decades to assess taxes and penalties when returns were not filed, but this rarely actually happens. The agency’s non-filing enforcement usually goes back no more than six years, and most actions dealing with SFRs and delinquent returns are completed less than three years after the return was due.
Figuring out Your Collection Statute Expiration Date (CSED)
While the IRS can pursue unpaid taxes indefinitely when the taxpayer involved did not file a return, they only have a limited amount of time to collect taxes when returns are submitted in a timely manner. The agency refers to the last day unpaid taxes can be collected as the Collection Statute Expiration Date. The collection period begins when the tax is assessed and usually lasts for 10 years. However, the amount of time the IRS could seek to recover unpaid taxes could be longer if you:
- File for bankruptcy
- Apply to the IRS for an offer in compromise
- Enter into an installment agreement with the IRS
- Ask for a Collection Due Process hearing
- Request relief for an innocent spouse
- Leave the country for six months or longer
To figure out your CSED, you can check the date on correspondence the IRS sent you about unpaid taxes or ask the agency for a transcript of your account.
An IRS Audit Can Sometimes Go Back Six Years
Federal law gives the IRS three years to audit taxpayers, but there are exceptions that can extend the audit period to six years. The most common reason for auditing returns more than three years old is a substantial error. If you omitted more than 25% of your income on your tax return, the IRS will have six years to conduct an audit. The audit period will also be extended to six years if you failed to disclose $5,000 or more of foreign income.
If you do not file a tax return or file a fraudulent return, there is no time limit on IRS audits. Filing taxes early does not start the clock on audits as the three or six-year period will not start until the due date. If taxes are submitted late, the audit clock starts on the filing date.
Eggshell and Reverse Eggshell IRS Audits
An eggshell audit is a civil proceeding that could turn into a criminal investigation. It is called an eggshell audit because the person being audited is said to be walking on eggshells. During an eggshell audit, the IRS agent is unaware of any criminal activity, but the person being audited has information that could get them into trouble. People are expected to answer questions posed by IRS agents fully and honestly, but they are not required to volunteer information that has not been asked for even if it is relevant.
A reverse eggshell audit is even more serious. During a reverse eggshell audit, it is the IRS agent who is walking on eggshells. This is because the agent knows that the audit is part of a wider investigation that could lead to criminal charges, but they do not let the person being audited know the predicament they are in.
IRS Audits Are Usually Not That Bad
Eggshell and reverse eggshell audits may sound ominous, but the vast majority IRS audits are far less intimidating. Most people think about offices filled with accountants, lawyers and IRS agents when audits are mentioned, but situations like this are quite rare. About 77% of IRS audits are conducted by mail and involve little more than submitting documents and answering a few questions.
People often confuse CP2000 notices with audits. The IRS sends about 4 million CP2000 notices each year to taxpayers who may not have declared all of their income. These notices are sent when the information on tax returns does not match the information provided by payers, employers or banks, and they are often received by people who did not report income they earned working as an independent contractor. An IRS audit is rarely an enjoyable experience, but the agency is more interested in collecting money than putting people in jail.
Professional Tax Help
If you have unfiled tax returns or are worried about an IRS audit, it is probably wise for you to consult with a tax professional before taking action. The Tax Crisis Institute has been helping California and Nevada residents and businesses with tax issues since 1983, and our experts will use all of their knowledge and experience to make sure that you do not pay a cent more than you have to. If you have questions or would like to schedule a free consultation, you can contact us by telephone or fill out our online form.