Tax Penalties for Not Filing Tax Returns
Tax Penalties for Unfiled Tax Returns: When taxpayers have not filed tax returns, they put themselves at continued risk for IRS penalties. The biggest problem with not filing a tax return is that the statute of limitations for the IRS to enforce fines and penalties for the unfiled tax return does not begin to run. Once a tax return is filed, then (under most circumstances) the IRS has three years from the filing date to audit a tax return.
With unfiled tax returns, the IRS has an unlimited time to audit the individual for the unfiled return. In addition, the Internal Revenue Service can pursue fines and penalties against the taxpayer.
If the fines and penalties are not paid, then interest will accrue — along with possible enforcement actions such as tax liens, levies, seizures, and passport revocations.
While not all taxpayers with unfiled tax returns will be penalized, the potential financial penalties usually do not outweigh filing a late tax return and trying to run-out the statute of limitations.
Form 1040 Penalties for Not Filing Tax Returns
When it comes to not filing a tax return, the IRS has various tax penalties it can issue against the taxpayer for the non-compliance.
Let’s go through some of the basics of the tax penalties for not filing timely tax returns:
Failure-to-File Tax Return Penalty
The failure-to-file penalty occurs when a taxpayer does not file a tax return timely. If a person applies for and receives an extension, then they have additional time to file their tax return timely — and the failure-to-file penalty would not kick in until after the extension deadline has passed.
Generally, the failure-to-file penalty is 5% per month and is based on the value of the unpaid tax liability — up to a total penalty of 25%.
The failure-to-file penalty is subject to limitations in conjunction with any failure-to-pay penalty that is also issued.
Typically, when a person does not owe any tax liability, then there would be no failure-to-file penalty.
Failure-to-Pay Tax Return Penalty
The failure-to-pay penalty is one of the most common tax penalties; if you do not pay your taxes timely, then you are penalized for the late payments.
Even if you file a tax return extension, the date for actually paying the tax liabilities is still April 15th.
The failure-to-pay penalty starts at 0.5% (not 5%) and then continues to increase based on how long the taxpayer goes without paying the outstanding tax liability.
Similar to the failure-to-file penalty’s maximum amount, the total failure-to-pay penalty is capped at 25%.
Estimated Tax Penalty
If a person underpays their estimated tax, a failure-to-pay penalty will kick in on the portion that is still outstanding.
Underreporting Tax Penalty
There are several instances in which the underreporting penalty may come into play.
Here are three of the more common situations:
Negligence 6662(b)(1) – 20%
Negligence occurs when the taxpayer makes a mistake about the reporting amounts (aka non-willful or inadvertent) and made no reasonable attempt to comply.
When taxpayer acts negligently with respect to properly reporting the income and deductions from their tax return, they may get hit with a 20% underreporting penalty.
Substantial Understatement of Income Tax 6662 (b)(2) – 20%
When the resulting understatement of income tax exceeds 10%, it may be considered “substantial.”
When a person has a substantial understatement of income tax — whether or not it is negligent — they can also get hit with a 20% penalty for under reporting income.
Gross Valuation 6662(h)-40%
A gross valuation refers to a significant miscalculation about the Taxpayer’s resulting tax liability.
When the understatement is considered a gross misstatement, the penalty can increase to 40%. In this type of scenario, when the inaccuracy is considered a gross valuation misstatement, it can result in the IRS pursuing a fraud investigation as well.
Tax Fraud Penalty
The penalties for fraud are serious.
When it comes to tax fraud, the IRS seeks to enforce a 75% penalty against the underpayment portion that is attributed to fraud.
Moreover, if any portion of the underpayment is considered fraudulent, then the entire portion is considered fraudulent unless the taxpayer can prove it is not fraudulent.
Unlike most other types of civil penalty enforcement, the IRS must prove the fraud by clear and convincing evidence instead of preponderance of the evidence (aka “more likely than not”).
Frivolous Tax Return Penalty IRC 6702
Filing a frivolous tax return can result in a $5,000 penalty in addition to the other penalties a taxpayer may suffer for filing an improper tax return.
Once the IRS deems a tax return frivolous, the concern is that the return is now on the IRS’ radar. This may lead to further investigation, examination, and audit on matters concerning fraud.
International Tax Reporting Penalties
While the penalties for not filing tax returns can be bad, the IRS penalties for unreported international information returns can be much worse.
International and offshore tax compliance forms are used to report foreign accounts, gifts, assets, trusts, businesses, and other investments to the IRS.
Some of the more common penalties include:
- Form 8938
- Form 3520
- Form 3520-A
- Form 5471
- Form 5472
- Form 8865
Criminal Tax Penalties
The majority of the time when the IRS seeks to enforce penalties for not filing tax returns, it is limited to civil penalties. Civil penalties refers to monetary fines.
If the Internal Revenue Service believes a person has committed a tax crime, then they may pursue a criminal tax investigation.
The penalties for criminal tax include both monetary fines and potential confinement (aka jail). Some of the more common types of criminal tax crimes involving tax returns, include:
Section 7201: Attempt to Evade or Defeat Tax
“Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
Section 7203: Willfully Fail to Pay Estimated Tax or Tax
“Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution.
In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure.
In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”.
Tax Amnesty Programs
The Tax Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.
Some of the more common programs, include:
- Voluntary Disclosure Program (VDP or “New” OVDP)
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
- Delinquency Procedures
- Reasonable Cause
Golding & Golding: International Tax Law Specialist Firm
Our FBAR Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.