Filing late tax returns: reducing penalties and the risk of prosecution

Morvillo Abramowitz Grand Iason Anello & Bohrer

Jeremy H. Temkin

April 15 is commonly viewed as “Tax Day” in the United States, but approximately 11 million taxpayers take advantage of the automatic extension that allows them to file their returns by October 15. While many taxpayers file for this six month extension because of unavoidable delays in obtaining information from third parties, for some taxpayers the decision to “go on extension” is driven by procrastination.

October 15 has now come and gone and, if history is any guide, some of the taxpayers who deferred filing their tax returns for no apparent reason other than avoidance of an unpleasant task failed to meet the extended deadline. These non-filers may now be subject to criminal prosecution. They will, however, be infinitely better off filing their returns late, than not at all.

While the government can use an untimely return as an admission that the taxpayer had income and owed taxes, the cost of making these admissions often pale in comparison to the alternative. The failure to file a timely income tax return is a misdemeanor, punishable by a year in prison, and prosecutors often use the repeated failure to file returns, combined with the substantial underpayment of taxes, to argue that the taxpayer intended to evade her tax obligations. 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.

Of course, for some taxpayers, the decision not to file is a misguided reaction to the lack of resources to satisfy their tax obligations. Unfortunately, this creates a vicious cycle whereby the failure to file returns on a timely basis results in the imposition of failure to file penalties on top of the failure to pay penalties that would be imposed regardless of whether the return was filed without payment. In other words, in addition to reducing the likelihood of a criminal prosecution, filing delinquent returns without the required payment will lower the taxpayer’s ultimate financial burden by stopping the accrual of some (but not all) penalties.

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. This is not to say that the IRS is showing a “warm and fuzzy” side to all delinquent taxpayers, but taxpayers who fall behind on their tax obligations need to be aware of their options for catching up.

Unfortunately, many taxpayers who have failed to file their returns over a number of years have an irrational fear of the consequences of coming forward, and thereby exacerbate the damage caused by their conduct. It is important for these taxpayers to recognize that, while dealing with an IRS revenue officer collecting back taxes, interest and penalties is undoubtedly unpleasant, it is a lesser evil than ignoring the problem and increasing both the financial burden and the risk of prosecution.