What Are The Penalties For Not Filing Your Tax Return?

Everybody knows the old saying about death and taxes, yet a surprising number of people fail to file an income tax return. If you’re one of those people and you think you’ll be able to slide by, you need to reconsider your position. Even if you’re unable to pay your taxes, you need to file a return. Not doing so will eventually lead to a domino effect of negative consequences.

No matter how many people have told you that it’s no big deal, or that the IRS has “bigger fish to fry” than you, the employees of the Internal Revenue Service have a job to do and a process that they follow. Even if no legal action is taken against you, failure to file a return will end up working against you. Let’s take a look at the rules regarding filing your taxes and the various outcomes that you risk:

Most are Required to File Tax Returns
If your income is less than the standard deduction and you don’t owe self-employment taxes, ACA penalties or refunds or qualify for a refundable credit, then you probably don’t have to file a tax return. However, these days with health and family assistance all tied to the tax return the number not required to file a return is shrinking. So just about all individuals, estates and trusts have to file a return and may have to pay taxes. Those are two different things, and there are penalties involved with ignoring or rejecting each of them. Even people who don’t have the money available to pay the tax that they owe are better off sending in a tax return rather than skipping the process. Here’s why:

  • The IRS imposes a fee for not paying your taxes, and they impose a separate fee for not filing. The larger of the two is imposed for not filing – it’s 4.5%, compared to just 0.5% for not paying, and that fee gets charged every single month. You can end up paying up to 22.5% for failure to file and 25% for not paying (plus interest on unpaid taxes accrues from the return’s due date until you pay). The bottom line is that whether you can pay or not, you’ll save yourself big fees by submitting the required paperwork.
  • In addition to incurring fees, consideration must also be given to the actions that the IRS takes when they haven’t received a tax return from a taxpayer. The process involves the preparation of a substitute return which will be completed without consideration of tax advantages, deductions or write-offs, which leads to a higher calculated amount owed than would be the case if you prepared and filed your return for yourself.
  • The IRS is limited by a rule known as the “statute of limitations” that gives them just three years from the date that you file to perform an audit. The three-year clock starts when you file a return, so the sooner you get the paperwork in, the sooner your risk of being audited expires. That statute also applies to any refund you might have coming, after three from the date of filing you forfeit any refund. Beyond audit, if the IRS allows ten years from the date of your filing to go by without pursuing your taxes owed, they lose their ability to collect taxes, penalty or interest. The same is true of your ability to include your tax debt, interest debt or penalty debt in a Chapter 7 Bankruptcy discharge is based upon the date of your tax filing (generally two to four years after your tax return is filed).

What happens if you file your return without submitting the money you owe?
Once the IRS processes a return that is not accompanied by payment or discovers a taxpayer’s failure to file and pay taxes, they issue a Notice of Tax Due and Demand for Payment that will detail how much you owe in taxes, interest, and penalties. You are able to submit payment via cash, money order, credit card, check or electronic funds transfer, and the sooner you submit payment the better, as penalties and interest will continue to accumulate. If you don’t have the funds available, it is better to contact the IRS and discuss your problem with them than to ignore the notification. Options for resolving your payment issue include:

  • Allowing a temporary delay. This is generally offered after a review of your situation, during which time the agency may file a Notice of Federal Tax Lien. This document will allow the government to put a placeholder on the amount that you owe them until such time that you are able to pay.
  • Setting up an installment agreement. This allows you to make smaller monthly payments based on what you can afford.
  • Settling through an Offer in Compromise. This is an agreement that is only possible after all other options have been exhausted, allowing you to pay a lower amount than what is owed. It is issued after a complete review of your financial situation and addresses penalties and interest along with the original tax amount itself. Reaching an Offer in Compromise requires filing an application that costs $150.

It’s important to remember that if you receive a tax bill that you think is incorrect, ignoring it is just as big a mistake as not filing a return. Instead, take positive action by contacting your local IRS office, taking all pertinent documentation along with you to prove your case.

The bottom line
Perhaps more important than all other reasons, you need to be aware that if you fail to file a tax return and you owe income tax, there is a possibility of consequences that go beyond the financial. You could end up vulnerable to criminal prosecution, as well as a whole lot of stress. By following the rules and staying in touch with the IRS, you’ll save yourself a huge headache, and a fair amount of money too. If you have any questions about the penalties for not filing your tax return, please contact us for assistance.

Procrastinating on Filing Your Taxes?

If you have been procrastinating about filing your 2017 tax return or have not filed other prior year returns, you should consider the consequences, including the penalties, interest, and aggressive enforcement actions. Plus, if you have a refund coming for a prior year, you may end up forfeiting it.

If you haven’t filed your return and you owe taxes, you will be subject to both a late payment and a late filing penalty. You should file a return as soon as possible and pay as much as possible to reduce the penalties and interest.

The failure-to-pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. Should you put off filing, if the IRS issues a notice of intent to put a levy on your property and any amount billed is not paid within 10 days, the interest rate will be increased to a full one percent per month.

There is also a penalty for not filing on time. The failure-to-file penalty is five percent of the tax owed for each month or part of a month that your return is late, up to a maximum of 25%. If your return is over 60 days late, there’s also a minimum penalty for late filing; it’s the lesser of $210 or 100 percent of the tax owed.

On top of that, in addition to interest and late filing penalties, interest accrues on the unpaid balance at the current federal short-term rate plus 3 percent compounded daily. Even if you have received extension, the late payment penalty and interest will accrue on any balance due, so it’s best to file as soon as possible to minimize them.

Of course, there’s no penalty for filing a late return if a refund is due. Penalties and interest only accrue on the unfiled returns of taxpayers who have a balance due and don’t pay by the deadline. However, you can lose your refund and potentially forfeit any tax credits you are entitled by waiting too long to file. In order to receive a refund, the return must be filed within three years of the due date.

Taxpayers who continue to not file a required return and fail to respond to IRS requests to do so may be subject to a variety of enforcement actions, all of which can be unpleasant.

You are strongly encouraged to bring yourself into compliance with your federal—and state, if applicable—income tax return filings. Please call us so we can help you file back returns and, if necessary, advise you on ways to pay or mitigate any tax liability and, when necessary, assist in establishing a payment plan.

I Didn’t File My Tax Return; Now What?

There are a lot of perfectly reasonable reasons for not having filed your income taxes. Many people who fail to file are new to the job market, and never having filed before may simply have been unaware of the requirement to do so. Some people know but are too overwhelmed with other life events, including illnesses, death, or job loss. Whatever your reason and whether you’ve only missed one year of filing or several, there comes a point when you either remember on your own or are prompted for a request for a copy. Now, what do you do? And how much trouble are you in?

Here’s the Good News
First of all, if you’re the one who realized that you haven’t filed rather than getting a notice from the IRS or your state tax authority, then you’re probably not in too much trouble. Even if you’ve gotten a notice, there’s a specific legal process that gets followed when a taxpayer hasn’t filed a return, and it is a perfectly reasonable procedure that can be addressed and managed. There is no reason to panic, as nobody is going to break down your door and haul you away. Filing taxes is a matter of paperwork and payment. If you haven’t been in compliance, you simply need to amend the situation and pay some penalties, and possibly some interest.

As A Matter of Fact …
You may not even have been required to file a return.

There are plenty of taxpayers whose circumstances are such that they aren’t required to file a tax return, and when that’s the case, the state frequently follows their lead (which is a good thing, as many times the penalties that a state charges for failure to file tax returns are higher than those imposed by the federal government.)

The best and easiest way to find out whether you are one of those who didn’t need to file is to visit the IRS website, where there is a handy tool called “DO I NEED TO FILE A TAX RETURN?” Plug in your relevant information about the tax year in question, your income, household composition and filing status for a quick answer. You may be in for a pleasant surprise unless you fall into one (or more) of the following categories:

  • You earned at least $400 in profit from being self-employed. This can include any job for which you received a 1099, and anything from doing freelance work as a writer to providing landscaping services for your neighbors. Driving for Lyft or Uber counts too.
  • You sold your house, even if it was a break even or loss and you had no income that year
  • You received unemployment benefits
  • You are a worker who earns tips and they weren’t reported to your employer. Even if you reported them you may have to file a tax return if they didn’t submit payroll taxes for them.

In each of these situations, you are required to file a tax return, regardless of how much or how little you earned and whether you paid taxes on those earnings or not.

Fortunately, filing a tax return is always possible, though you may have to pay a penalty.  On the flip side, you may actually have a refund coming which obviously will benefit you to file.

Did the Government Do It For You?
Though the IRS doesn’t always catch every time that a taxpayer fails to file a tax return, when they do they will send out a notice. And if your Social Security Number was linked to any type of document or paperwork that they received, whether that’s a W-2, a 1099 or any other type of form, they also probably filed a substitute tax return to make up for your oversight. These substitute returns represent a bare minimum of information. They don’t enter any of the information that you might have provided in order to minimize your tax liability – they use the standard deduction and personal exemption, then record the income information that they have. It’s also what they’ll use to figure out your penalties, interest, and fines owed.

There are a lot of reasons why you should take action to get a real tax return in for yourself instead of the substitute return that the government provided, but one of the best reasons is that when you’re asked for a previous year’s tax return so you can take out a loan, the substitute won’t satisfy the lender’s requirements.

Better Late Than Never, But It Has to be Right
When you’re filing a past-due tax return, you want to make sure that every “t” is crossed and every “I” is dotted. This is no time for making mistakes or leaving out important information. Even if your returns are generally simple, you’d be wise to work with an experienced tax professional in getting your papers turned in to the federal and state authorities. They will look out for your best interest, helping you to avoid any potential pitfalls and acting on your behalf to address complex questions and offering authoritative explanations of your inaction if necessary.  In some circumstances a tax professional can even get your penalties abated or minimized.

If You Owe the IRS a Lot of Money, You May Not Want to Plan Any Out-of-the-Country Trips

As promised several months back, the IRS has begun to crack down on seriously delinquent taxpayers. A law passed on Dec. 4, 2015, that requires the IRS to notify the U.S. State Department when someone has “seriously delinquent tax debt,” after which the State Department will generally deny an application for issuance or renewal of a passport for that individual and can even revoke or limit a previously issued passport.

It has taken the IRS and the State Department some time to establish the procedures for this program, but they are finally in place and are being implemented in January 2018.

A “seriously delinquent tax debt” is the unpaid, legally enforceable, and assessed federal tax liability of an individual that is greater than $51,000, for which a notice of federal tax lien has been filed and the taxpayer’s right to a hearing has been exhausted or lapsed, or a levy has been issued. The total amount of all current tax liabilities (including penalties and interest) for all tax years and periods meeting these criteria is included in determining if the $51,000 threshold is met.

Seriously delinquent tax debts do not include those for which the IRS or the Justice Department and a taxpayer have entered into a valid payment agreement, such as an installment agreement or an offer-in-compromise payment plan. Tax debts for which collection has been suspended pending a due-process hearing or those suspended as a result of an innocent spouse claim are also excluded from the definition of a seriously delinquent tax debt.

The law requires the IRS to contemporaneously notify a taxpayer when it has certified the taxpayer as having a seriously delinquent tax debt, so that the taxpayer has time to request a judicial review before steps are taken to deny or revoke a passport.

This provision does not apply to an individual serving in a combat zone or participating in a contingency operation.

If you or someone you travel with has a seriously delinquent tax debt and you have questions about this subject, please give us a call.

Foreign Account Reporting Requirements (FBAR)

U.S. citizens and residents with a financial interest in or signature or other authority over any foreign financial account need to report that relationship by filing FinCEN Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during 2016. Failure to file can result in draconian penalties.

CAUTION: Prior to 2016, the Form 114 was not required until the end of June. That due date has been moved up to April 18, 2017 for 2016 reporting. Previously there was no filing extension allowed, but the law that changed the filing date also gave FinCEN the authority to provide a six-month extension. FinCEN announced that an extension to October 16, 2017 will be automatic for anyone who was required to file Form 114 by April 18, 2017 but failed to do so.

Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, or other accounts at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included. It becomes a “foreign financial account” if the financial institution is located in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account, and the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account.

You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank account in case something happens to them. If the value of the account exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.

You may also have an additional requirement to file Form 8938, which is similar to the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married filing jointly, you must file Form 8938 if the value of certain financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high $50,000.

As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions. Please call this office with questions or if you need assistance in meeting your foreign account reporting obligations.

Health Reimbursement Arrangements Approved For Qualified Small Employers

Under the Affordable Care Act (ACA or Obamacare), a health reimbursement arrangement (HRA) is treated as a group health plan, and as such, it has to meet all of the ACA’s market-reform requirements, which is not possible for the typical HRA. Stand-alone HRAs do not meet two key requirements of the ACA in that they:

  • Limit annual dollar benefits for the insured and
  • Fail to provide certain preventive-care services without cost-sharing requirements.

Previously, under the IRS’s interpretation of the ACA law, employers who offered stand-alone HRAs were subject to a draconian excise tax penalty of $100 per day per employee (maximum: $36,500 per year). That is a chilling penalty for any small employer, and it caused most of them to back away from offering any sort of health coverage for their employees.

To alleviate this problem, Congress passed the 21st Century Cures Act, which is generally effective beginning in 2017, and which created a “qualified small-employer HRA” that is not treated as a group health plan for income tax purposes. Thus, a qualified small-employer HRA will not face the $100 per day excise tax that is levied on group health plans that don’t meet the ACA’s market reform requirements.

To qualify as a small-employer HRA, a plan must meet the following requirements:

  1. An eligible employer maintains it. An eligible employer is one that employs fewer than 50 employees (in full-time equivalents) and that does not offer a group health plan to any of its employees.
  2. The HRA is provided on the same terms to all eligible employees except:
    • Those who have not completed 90 days of service,
    • Those under the age of 25,
    • Part-time workers (generally those working an average of fewer than 30 hours per week),
    • Seasonal workers (generally those employed for 6 months or fewer during the year),
    • Employees covered by a collective bargaining unit, and
    • Certain nonresident aliens.
  3. The HRA is funded solely by an eligible employer, with no salary-reduction contributions.
  4. The HRA only reimburses the employees after being provided with proof of their medical expenses.
  5. The HRA limits reimbursements to $4,950 (or $10,000 if the plan includes family members) per year. Amounts are subject to inflation adjustments for years after 2016. For employees who are covered for less than a full year, the dollar limits are prorated.An employee’s premium tax credit is reduced for any coverage month when the employee is provided with a qualifying HRA. To prevent “double dipping,” if the employee purchases health insurance through the Marketplace, that employee is required to notify the Marketplace of his or her permitted benefit for the year under the HRA.

Partners in a partnership or limited liability company (LLC) or owners and officers with greater than a 2% share of a Subchapter S corporation must treat any reimbursement under an HRA plan as taxable income, and may then deduct as an above-the-line deduction their cost of health insurance that was included in income. For greater than 2% shareholders of a Subchapter S corporation the taxable reimbursements are subject to income tax withholding.

If you have questions related to how your business could use a qualified small-employer HRA, please give this office a call.

Dodging Tax Penalties

Most taxpayers don’t intentionally incur tax penalties, but many who are penalized are simply not aware of the penalties or the impact they can have on their wallet. As tax season approaches, let’s look at some of the more commonly encountered penalties and how they may be avoided.

Underpayment of Estimated Taxes and Withholding – Taxpayers are required to pay their tax liability as they go during the year, either through withholding or by making estimated tax payments. If the taxpayer owes more than $1,000 when filing his or her return for the year, the IRS will assess the underpayment of estimated tax penalty, which is currently 4% of the underpayment computed quarterly. There are “safe harbor” payments that can protect you from this penalty, which include payments in the following amounts: 90% of the current year’s tax liability or 100% (110% for high-income taxpayers) of the prior year’s tax liability. Farmers and fishermen need only prepay 66-2/3% of the current liability or 100% of the prior year’s liability.

Late Paying Penalty – When the tax owed on a return is paid after the unextended due date of the tax return (usually April 15), the taxpayer is subject to a penalty of 1/2% per month (maximum 25%) on the unpaid balance. Taxpayers are frequently caught by this penalty when they need an extension to file their tax return. Many fail to realize that the extension does not include an extension to pay. The only way to avoid or minimize this penalty is to have no or little balance due on the return when it is finally filed. The extension form includes a provision to pay the projected balance owed when filing the extension.

Late Filing Penalty – If the return is filed after the due date, including extensions, a late filing penalty of 4.5% per month (maximum 22.5%) applies. The automatic extended due date for 2016 returns is October 18, 2017, but an extension request form must be filed by the April 2017 due date to qualify. Thus, the penalty would generally apply to 2016 returns filed after October 18, 2017. If the return is over 60 days late, the minimum penalty for failure to file is the lesser of $205 or 100% of the tax shown on the return. While the obvious way to avoid a late filing penalty is to file in a timely fashion, the IRS will consider abating the penalty if it can be proven that there was reasonable cause and no willful neglect for filing late.

Negligence – When underpayment is due to negligence on the part of the taxpayer or when there are errors in tax valuations, 20% of the tax underpayment is charged. This penalty is frequently encountered when the IRS adjusts a filed return due to unreported income or overstated deductions. To reduce the chance that you may be subject to this penalty, be sure you provide all of your W-2s, 1099s, K-1s, etc. for the preparation of your return, complete any organizer that have been requested and ensure that you can substantiate all of the deductions you claim.

Dishonored Check – The penalty for dishonored checks is 2% of the check amount, but if the amount is $1,250 or less, the penalty is the amount of the check or $25, whichever is less. If you don’t have sufficient funds to pay your tax when you file your return, rather than writing a check that you know will bounce, you may be able to arrange an installment payment plan with the IRS. You may still incur late payment charges, but the penalty rate is lower if you are on a payment plan.

Missing ID Number – This penalty of $50 for each missing number is charged when a taxpayer doesn’t provide a required Social Security number (SSN) for him or herself, a dependent or another person on his or her tax return. It is also charged when the taxpayer doesn’t provide his or her SSN to another person or entity when required.

There are more severe penalties not mentioned here that apply to fraudulent actions or claims. In addition to the late filing penalty, it is possible to have some of the other penalties abated for reasonable causes. If you have questions related to the application of any of these penalties, please give this office a call.