What happens if you fail to pay your taxes?
It’s not good. Michael S. Fried, of Fried & Rosefelt, has witnessed it many times. Driven by sleepless nights, clients come to him to resolve unpaid tax return problems. “The quality of their life deteriorates when they put off solving the problem,” says Fried. “It doesn’t go away.” Not reporting income does more than affect your quality of life.
“Any situation where someone has the intent to evade or cheat and acts in that direction is illegal,” says Scott D. Michel of Caplin & Drysdale. “If the IRS sees enough badges of fraud and evidence of intent, they can turn it into a criminal case. But even if they don’t, there could be significant—and in some cases catastrophic—financial consequences.” Being proactive with tax payments can help avoid potential prosecution.
The Good News
“Although failure to file is a crime, the IRS will normally give you a couple of opportunities to pay once they’ve found you or you come forward on your own,” says David S. De Jong
of Stein Sperling Bennett De Jong Driscoll.
It’s better to file the back year federal tax returns than not to file—even if you can’t make a payment.
“Failure to file returns can itself be a criminal offense, and it’s better to get the returns in and deal with the collection side of the IRS,” Michel says. He notes you may qualify for a payment program or extension, but that you should hire a qualified tax preparer and fully disclose your financial situation. Being truthful to the tax preparer can guard against future accusations of wrongful conduct if the return is inaccurate.
If you don’t file, you may be tempted to skip the next year—and the next. “At some point, the IRS will most certainly catch up,” De Jong says.
Delinquent taxpayers who come forward should file complete and accurate returns, Michel says. The IRS Fresh Start initiative has a variety of programs to help settle an IRS tax debt and avoid liens.
Other tools to help tackle debt, according to Fried:
- offers of compromise
- installment programs
The IRS’s voluntary disclosure program
may provide protection against criminal prosecution if the disclosure is timely, complete and accurate, and if the taxpayer cooperates with the IRS and pays, or makes a good faith effort to pay.
“In a voluntary disclosure, while there can be civil penalties in some circumstances, the amounts of these penalties are often below—and in some cases, far below—what the law would allow the IRS to impose,” Michel says.
If you owe a substantial amount of money, you’re being audited, or you’re contacted by the IRS’s criminal investigation division.
“Rush to consult with counsel,” DeJong says of this last one. “When they are involved, it is a serious matter.”
“My colleagues and I have seen every kind of tax fraud imaginable in 30-plus years of practice,” Michel says. “The U.S. has a remarkable system of voluntary compliance, but some people still are motivated to cheat. Aside from being unquestionably illegal, cheating is not worth the hassle, the cost in some cases, or even going to jail. Pay the tax and move on.”
If you want more information on this area of law, see our tax overview