According to the IRS, taxpayers are required to file an income tax return “for any year in which a filing requirement exists,” based on factors such as age, filing status and income. Even when a return is not required, there are often compelling reasons to file anyway, such as the possibility of getting a refund. Still, every year many people do not file a tax return even when the IRS considers it mandatory.
The IRS investigates close to 1 million nonfiler situations each year. Their agents provide many warnings throughout the process, and it is almost never too late to try to work with them. When the IRS determines that you were required to file and did not, they send several letters encouraging you to file and warning of possible consequences. Even a late return is better than no return at all. After about a year, the IRS will prepare a Substitute for Return, sometimes referred to as a Ghost Return. This tax return will include all of your income with no deductions for exemptions or expenses. The IRS will use this to compute your tax liability, including penalties and interest. Since the substitute return is so unfavorable to the taxpayer, the tax liability is typically far more than the taxpayer actually owes.
After the first bill, the IRS will send at least one more bill, which will be even higher since penalties and interest have continued to accrue. If there is still no response, the IRS will begin collection proceedings.
At every stage of the collection process, taxpayers have opportunities to work with the IRS. As soon as a controversy arises, taxpayers can contact the Taxpayer Advocate Service, whose goal is to help people who are having financial difficulties. The IRS also offers installment agreements where taxpayers make small periodic payments over time to pay off their bill. Another option is to apply for an Offer in Compromise, where the taxpayer seeks to settle unpaid taxes for less than the full amount owed. The IRS will even consider requests to delay collection. A tax professional can help navigate the range of options.
Once a taxpayer receives notice that a substitute return has been filed, it becomes even more important to file the correct return for that year. Once accepted, the IRS will adjust the taxpayer’s account, which often drastically reduces the amount owed. This can be done at any time, even without including a payment.
The IRS generally has three years after a return is filed to make an assessment of the tax liability. If no return is filed, this statute of limitations does not begin to run. After assessment, the IRS then has 10 years to collect the taxes.
When the IRS does not receive a response to its letters, it begins collection actions such as tax liens and levies. A federal tax lien is a legal claim against the taxpayer’s current and future property (often a house or car), and rights to property such as wages and bank accounts. The IRS files a Notice of Federal Tax Lien with local or state authorities, providing public notice to creditors and damaging the taxpayer’s credit rating. While a lien is a legal claim against the taxpayer’s property, a levy is the actual seizure of that property to satisfy a tax debt.
Again, taxpayers have numerous opportunities to review, delay or stop these actions. A Collection Due Process hearing can be used to review collection actions that have been taken or proposed, and the Collection Appeals Program is available to review an IRS employee’s actions. In addition, taxpayers can appeal any Notice of Federal Tax Lien, and a Notice of Intent to Levy provides an automatic right to a hearing.
The worst thing people can do when dealing with the IRS is to bury their head in the sand. It is almost never too late in the process to engage with the agency, and tax professionals can be immensely helpful in calculating the proper tax owed and developing a plan to pay.