It’s the time of year when people, as well as companies, have to deal with preparing income tax returns. April 15th is the deadline for filing income tax returns but that date can be delayed to October 31st by filing an extension with the Internal Revenue Service (IRS). The extension must be submitted by April 15th. In addition, any tax due must be paid by April 15th.
The failure to file a return carries a penalty of 5% of the amount required to be shown on the tax return for each month, or fraction of a month, that the return is late. This penalty is subject to a maximum of 25%. The failure to pay the tax within the time allowed results in a 0.5% penalty for each month, or fraction of a month, not to exceed 25%. In addition, the IRS charges interest which is compounded daily
If the IRS believes that the failure to timely file the return was fraudulent, the civil penalty is 15% per month, up to a maximum of 75% on the amount of tax that should have been shown on the tax return. These civil penalties for failure to timely file and pay, can significantly increase the amount due to the IRS.
The law also provides that the willful failure to file a tax return and pay tax can be a crime. If a person knows a tax return is due or a payment of taxes is required, and willfully decides not to file the tax return or not to pay the tax, that person may be prosecuted. A criminal prosecution for failure to timely file the tax return can result in a prison sentence of up to one year in prison for each year a return is not filed. Likewise, each year of willful nonpayment of tax can be punished by up to one year in prison. It is the normal practice of the IRS not to bring a criminal case for failure to file the tax return or pay the tax, unless there are multiple years involved. It is common that a prosecution will involve 3 or more years of failure to timely file or pay. A conviction can also result in a $25,000 fine for a person and a $100,000 fine for a corporation. This is in addition to paying the tax plus interest and civil penalties.
Many people do not understand how a person cannot file tax returns for years. I have had clients explain that he or she failed to file a tax return one year for an innocent reason, such as being ill or out of the country. The person is afraid to file a tax return the next year and this repeats itself until many years have gone by without filing a tax return. If the IRS discovers a person has failed to file tax returns for several years, the chance of a criminal prosecution increases significantly.
There are ways to deal with multiple years of not filing file tax returns. In November of 2018, the IRS announced new guidelines for the VOLUNTARY DISCLOSURE PRACTICE (VDP). Under the VDP, a person is able to file late tax returns and avoid prosecution as long as certain conditions are met. Some of the more significant conditions are that the person’s income cannot be from illegal sources and that the person cannot be under audit or criminal investigation. In addition, the individual must fully cooperate in the IRS audit and reach a settlement which includes payment of all taxes, interest, and civil penalties.
The VDP, as in all matters related to the IRS, is not simple nor easy-to-understand. An experienced criminal tax defense lawyer should be utilized to successfully complete the VDP and avoid criminal prosecution.
By Mark L. Horwitz
Criminal Defense Attorney
Law Offices of Horwitz & Citro, P.A. Offices in Orlando and Tampa