Last year, various sources reported that IRS criminal referrals had reached a 30-year low, partially because of congressional cuts that dramatically reduced the Service’s budget from about $14billion in 2010 to about $12 billion by 2017. That was last year, and the trend is changing.
While revenue agents and revenue auditors examine taxpayers, they do not conduct criminal investigations. Instead, they refer those cases to IRS-CI when apparent indicators of tax fraud, or willful misconduct, are discovered. However, these referrals had not been occurring as often as the IRS would like.
In an effort to address this issue, the IRS released a new initiative earlier this year to increase the number of tax fraud referrals to IRS-CI, which is the IRS’s criminal division. This announcement benefits the federal government, because it loses billions of dollars to tax evasion each year, while menacing for taxpayers who are behind on their taxes or out of compliance with asset reporting laws, such as FACTA.
If you have not filed tax returns, failed to report income, failed to pay taxes, or failed to report foreign assets, the risk of being referred for an IRS criminal investigation has dramatically increased. The risk is even greater if you have been chosen for an IRS audit.
Imposition of Tax Penalties
While not all audits will result in a criminal investigation by the IRS, some audits will cause taxpayers to face a much higher tax bill due to penalties and interest. The IRS assesses penalties to encourage taxpayers to be in compliance with their filings and tax payments. If a taxpayer is not in compliance with the filing of their tax return and/or do not pay their tax liabilities in full, the IRS will asses the failure to file penalty, failure to pay penalty, and/or failure to make sufficient estimated tax payment penalty.
Failure to File Penalty
Pursuant to IRC section 6651(a)(1), the IRS will generally assess a failure to file penalty when a taxpayer does not timely file his or her tax return by the filing due date or by the extension deadline. If the return is not timely filed by the extension date (usually October 15th), the IRS will assess the failure to file penalty.
The penalty for failing to file the return later is 5% of the unpaid taxes for each month (or for part of a month) that the tax return is late. Moreover, if the return is over 60 days late, then the minimum penalty is the lesser amount of either $135 or 100% of the unpaid tax, and the maximum penalty is 25% of the unpaid tax. For example, if a taxpayer is 6 months late with filing his or her tax return, the taxpayer will be assessed the maximum penalty of 25%.
Failure to Pay Penalty
Pursuant to IRC section 6651(a)(2), the IRS will generally assess a failure to pay penalty when the taxpayer does not timely pay their tax liability by the April 15th due date. Unlike filing, a taxpayer cannot extend the tax due deadline. The IRS will assess the failure to pay penalty on any unpaid taxes unless 90% of the actual tax liability is paid on or before the due date (usually April 15th).
The penalty for failing to pay by the due date is 0.05% of the unpaid taxes for each month the taxes are not paid; however, if a taxpayer pays at least 90% of the actual tax liability on or before the due date, the failure to pay penalty will not apply during the six-month extension. Like the failure to file penalty, the maximum penalty for failing to pay is 25% of the unpaid tax.
But note, if a taxpayer filed on time and is on an installment agreement, the failure to pay penalty is reduced; however, once the IRS makes a demand for payment, the failure to pay penalty is increased to 1% per month. Additionally, if both the failure to file and failure to pay penalty apply in any month, the failure to file penalty of 5% is reduced by the failure to pay penalty.
If you have years of unfiled tax returns, there is no better time than now to get them filed. Be proactive and contact Onyx Tax today to get the process started.