The IRS Knows You Did Not File
Every W-2 and 1099 you receive is also sent to the IRS. They know exactly how much income you earned. When you do not file a return, the IRS does not just forget about you. They create a substitute for return, or SFR, using the information they have. The problem is that the SFR gives you no deductions, no credits, and no favorable filing status. You get taxed on gross income with the worst possible calculation.
The Penalties Stack Up Fast
The failure to file penalty is 5 percent of the unpaid tax per month, up to 25 percent. The failure to pay penalty is 0.5 percent per month, up to 25 percent. Plus interest on everything. A $10,000 tax balance can grow to $15,000 or more in just two years with penalties and interest.
Here is the kicker. The failure to file penalty is 10 times worse than the failure to pay penalty. If you cannot afford to pay, file the return anyway. You cut your penalty exposure dramatically.
Criminal Exposure
Willful failure to file a tax return is a misdemeanor under IRC Section 7203. Each year of willful failure is a separate count carrying up to one year in prison and a $25,000 fine. In practice, the IRS rarely prosecutes people who voluntarily come forward and file their delinquent returns. But if the IRS comes to you first, the calculation changes.
How to Get Current
The IRS generally requires you to file the last six years of returns to be considered in compliance. You do not need to go back 15 or 20 years. File the last six, get current on your estimated payments or withholding, and you can start resolving the balance owed.
A tax attorney coordinates this process. We pull your IRS transcripts to see what information the IRS has, reconstruct your income and deductions for each year, prepare the returns, and then immediately begin negotiating the resulting balance. The goal is to get you compliant and into a resolution as quickly as possible.