Question

4. Alice’s brother, Edward, did not file his 2012 income tax return because he did not have the money to pay his taxes. When he finally did have enough money, he was afraid to pay because he thought the IRS would throw him in jail. This fear then stopped Edward from filing his 2013-2016 returns. He has now come to you, wanting to make things right.

a. What crimes, if any, has Edward committed?

b. What defenses can Edward present to the IRS arguing he should not be prosecuted?

Answer 1

a.  Intentionally failing to file a tax return can result in stiff penalties including up to one year in prison and $100,000 in fines along with the prosecution costs.

Edward will probably face two types of penalties: one for not filing or efiling a tax return or extension on time, and one for not paying your taxes on time.

The failure-to-file penalty is 5% of your balance due for every month (or part of a month) in which your taxes go unpaid. The amount you owe for this penalty will be reduced by the amount you owe for the failure-to-pay penalty. The maximum amount of this penalty is 25% of your unpaid taxes. If you file your tax return more than 60 days late, the minimum failure-to-file penalty will be 100% of your unpaid taxes or $205, whichever is smaller.

The failure-to-pay penalty is 0.5% of your balance due for each month (or part of a month) in which your taxes remain unpaid. This penalty will not be more than 25% of your unpaid taxes.

If both penalties apply to you during the same month, the failure-to-file penalty is reduced by 0.5% per month. The 25% cap applies to both penalties together.

b. Regardless of the harsh penalties, the IRS does not seek prosecution for all of the people whom they discover have not filed taxes. Instead, the IRS first seeks to educate non-filers and assist them in mending their non-taxpaying ways.

Filing a late tax return before being contacted by an IRS special agent (i.e., criminal investigator) will substantially reduce the likelihood of a criminal prosecution for either the initial failure to file or more serious felony tax evasion charges.

The IRS has increasingly recognized the dilemma facing the taxpayers who have fallen behind on their tax obligations, and has implemented a “Fresh Start” initiative to provide penalty relief to certain unemployed taxpayers, offer installment agreements to more taxpayers, and make the “offer in compromise” program more accessible.

Therefore, it is advisable for Edward, to file the late income tax return, pay taxes and penalty, and can work with IRS to cover him under Fresh start initiative to prevent him for prosection.