Taxpayers with a filing requirement need to file a timely, accurate annual tax return: non-filing can cause serious IRS enforcement action, including both civil and criminal investigations.
The penalties for late filing can be substantial but can be abated under the first-time abatement or for a reasonable cause: for individual returns, late filing penalties only apply if you owe additional tax. However, the penalties can be significant- 5% per month, up to 25%. Fraudulent failure to file is 15% per month, up to 75%. Taxpayers can request relief for the first year of late filing penalties if they have a clean compliance history for the prior three years using the IRS’ first-time abatement waiver. If the taxpayer does not qualify for first-time abatement, they can request relief if they can show that they had unforeseen circumstances outside of their control that caused the late filing (reasonable cause argument).
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For individuals, the IRS usually only requires that you file the current and last six tax years to be filing compliant: IRS Policy Statement 5-133 only requires individual taxpayers to file the past six years of returns.
The IRS can deviate from this policy if they believe the taxpayer will owe significant amounts in years prior to the last six tax years, if the taxpayer is a business, or if the taxpayer has a history of significant noncompliance. Normally, deviations to the policy originate when the taxpayer is assigned to IRS field collection (i.e. a revenue officer).
IRS transcripts can help you file an accurate prior year return: the IRS can provide you wage and income information by year (called an IRS wage and income transcript) as well as an account transcript to show any payments or credits.
If you do not file a return, the IRS can file one for you – and you will owe taxes, penalties, and interest: this return is called a “substitute for return” or “SFR.” The IRS will prepare and process a balance due return that only includes the taxpayer’s income and withholdings – no deductions, preferred filing status, or credits are allowed.
Taxpayers can use special procedures to file an original return to replace the SFR return.
The IRS can freeze future refunds: taxpayers who do not file a required return can face IRS refund freezes on returns filed in future years.
Late filers may have to use special IRS procedures to file their returns: some procedures include matching their return to IRS income records and filing their return directly with the enforcement function (Collection, audit, etc.) at the IRS.0
Late filing is enforced by IRS Collection employees: these investigations are called taxpayer delinquency investigations or return delinquency investigations. IRS Collection employees (revenue officers and Automated Collection staff) are responsible for pursuing non-filers. However, all IRS enforcement personnel (audit, collection, etc.) can pursue enforcement against a non-filer.
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