Didn't File Your Taxes? Factors to Consider When Filing Late Returns
Updated: Jul 14
Taxpayers who fall behind in making payments or filing returns often believe that if the IRS has not sent them a notice letter after a few months or years, that they are in the clear. Often this is a mistake. The IRS takes time processing reports and information returns from various sources, which can be delayed multiple years. Further, future taxpayer activities like a new job with a W-2 or an unreported payment with a 1099 may trigger an audit of the taxpayer’s returns. When the IRS reviews a taxpayers history and unfiled tax returns exist, the IRS may review the case file for fraud. Willful failure to file a tax return is a misdemeanor, and a felony where there is an overt act of tax evasion. An additional failure to file fraudulent penalty may be assessed against the taxpayer.
The IRS has procedures to follow when the initial case screening suggests fraud may exist. As part of this process, the IRS agent will review the case for various badges of fraud. There are many but a common theme or pattern of taxpayer behavior generally exists. At a minimum, the IRS looks at the taxpayer’s history of filing compliance including timeliness and completeness. In addition, the ability to pay will be reviewed. While it may appear that an ability to pay tax and the failure to do so by filing returns is enough to be fraudulent, the IRS requires more factual support to find that fraud exists. Additional factors that must be considered include ignoring repeated contacts by the IRS, concealing or underreporting income or assets, providing incomplete or misleading information to the IRS, offering inconsistent or implausible information, refusal to explain any noncompliance, inadequate record keeping, and the use of excessive amounts of cash transactions to pay for expenses. This is a not an exhaustive list of factors.
If the IRS believes fraud may have occurred, after a review of the fraud indicators, the IRS takes additional steps that may surprise taxpayers. If a taxpayer believes the IRS may be reviewing their case for fraud, this is an especially important step. The IRS will not contact the taxpayer requesting the taxpayer to file tax unfiled returns or take additional steps towards being in full compliance. The IRS will also not give any advice to the taxpayer, nor will it discuss the tax liability, penalties or other matters related to the possibly tax years subject to the fraud review. The IRS will not discuss the possibility of any criminal referral with the taxpayer. This cold shoulder should tip off the taxpayer that they may be in trouble and should seek out counsel.
In cases where the IRS decides it will not seek a criminal referral, a substitute for return is generated for the taxpayer. A substitute for return is a return where the IRS will use available information to prepare the unfiled tax return. This return may differ drastically from what the taxpayer may have voluntarily prepared and filed.
After reviewing a taxpayer’s return status for fraudulent intent, if no fraud is found, the IRS will continue its exam of a delinquently filed return or the substitute return. Where evidence supports the fraudulent civil penalty, the IRS may assess it when clear and convincing evidence supports it. In cases where a taxpayer has been convicted of a felony or misdemeanor for tax fraud, the IRS will assert the penalty and in certain cases, a taxpayer is stopped from denying the fraud exists. Taxpayers may challenge the amount of the penalty in such cases.
The IRS standard for prlursuing a civil fraud claim requires clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. The evidence presented by the IRS must show the taxpayer’s intent to evade the assessment of tax, which the taxpayer believed to be owing. Intent may be difficult to prove and can be distinguished from inadvertence, reliance on incorrect technical advice, sincerely-held difference of opinion, negligence or carelessness.
The rules for joint returns differ slightly in that intent must be established separately for each spouse in the return. The fraud of one spouse cannot be used to prove fraud by the other spouse, but may be evidence to support the fraud. The IRS may apply the civil fraud penalty only on one spouse, but may applyvthe charge against both if there is sufficient evidence that both spouses participated in the fraudulent act.
To prove fraud, the IRS must show that there is an additional tax due and owing as a result of the deliberate acts to evade a tax. In addition to the tax due, there must be a willful and material submission of false statements or false documents in connection with a return. Basically, an intent to deceive the IRS and similar to the basic definition of fraud under ordinary fraud statutes.
Fraud is generally defined as deception by misrepresentation of material facts, or silence when good faith requires expression. There also must be material damage to one who relies on it and has the right to rely on it. In other words, fraud requires obtaining something of value from someone else through deceit.
If if you have unfiled tax returns and need advice on how to approach becoming fully tax compliant, contact tax attorney Andrew Steiger at Steiger Tax Law to discuss your tax problem. All discussions are confidential and privileged.