IRS Tax Problems: The Consequences of Not Filing A Federal Tax Return
Kevin Rego • August 13, 2023
San Mateo, CA: Are you aware of the potential consequences if you fail to file your federal tax return by the due date or extension date?
You should be aware of the potential consequences if you fail to file your federal tax return by the due date or extension date. From their latest estimate, the IRS believes approximately 5 million people that SHOULD have filed a tax return did not. If you are one of those taxpayers, it is crucial to understand the implications of not filing a tax return. Here are a couple of consequences:
1. Failure to File Penalty:
One of the most critical consequences of not filing your tax return on time is the failure to file penalty. This penalty is imposed by the IRS automatically as a way to encourage timely filing.
The failure to file penalty is calculated based on a percentage of the taxes you owe. It begins accruing from the original due date of the return (without regard to extension) and continues to accumulate for each month or part of a month your return is late. This can quickly lead to a substantial amount owed on top of your original tax liability.
For instance, the penalty amounts to 5% of the unpaid taxes per month that your return is late, up to a maximum of 25%. It is easy to see how quickly you can dig yourself into a tax hole with this penalty alone. Say you owe $5,000 after completing your tax return in April. By September, your tax bill has risen to $6,250 plus interest. And yes, interest is charged both on the penalty AND the tax due!
Even for those who file "a little late", if your return is over 60 days late, the minimum penalty can be either $435 or 100% of the taxes you owe, whichever is less.
2. Substitute for Return (SFR):
If you don't file a return, the IRS might prepare a "substitute for return" (SFR) on your behalf. An SFR is a tax return prepared by the IRS from the limited information available to the IRS, such as income reported by third-party reporters like employers and brokerage accounts. The SFR does its best to cover all your reported income, but rest assured that the IRS does not work as hard to include deductions and credits you're eligible which results in a potentially higher tax liability.
Why Seek Help:
If you've missed the filing deadline, don't panic. As a certified tax attorney, I specialize in tax resolution and can help you navigate through these complexities. I can assist you in filing delinquent returns, ensuring you claim all the deductions and credits you're entitled to, potentially reducing your tax liability. We may even be able to abate some of the penalties if you have good cause or are not a habitual non-filer. Even the IRS understands that things happen in life sometimes.
It is always better to address the issue proactively . If you or someone you know hasn't filed a tax return, reaching out for professional assistance can make a significant difference in the outcome. Like most things, ignoring the problem only makes it worse.
Kevin Rego
Law Office of Kevin Rego
650.933.5222
A recent U.S. Tax Court case is a cautionary tale every taxpayer who takes a charitable donation deduction on their annual tax return needs to hear. A couple donated a piece of land worth thousands of dollars to their city in the state of Utah. They had letters, a deed, city council records — a whole file of documents showing the donation was legitimate. They filed their tax return with the donation deduction and that is when things went haywire. The IRS disallowed the entire deduction. In subsequent litigation challenging the disallowance, the US Tax Court agreed with the IRS. Not because the donation was not real. Not because the land had no value. But because the paperwork did not say the right things. Here is what you need to know to protect your deduction. The Magic Number Is $250 If your charitable contribution — cash or property — is $250 or more, the IRS requires a Contemporaneous Written Acknowledgment (CWA) from the charity. “Contemporaneous” means you must have this document (1) on or before the date you file your return or (2) the due date of the tax return — whichever is earlier. Without it, if your charitable deduction is challenged by the IRS, your deduction is likely gone. What the Letter MUST Contain Under I.R.C. § 170(f)(8)(B), the CWA must include all three of the following: A description of what you donated. For cash, state the dollar amount. For property, describe what was received by the charity. The charity does not need to state the value — but they must describe what they got from you. An affirmative statement about whether the charity gave you anything in return for the donation. This is the one that trips up ALOT of taxpayers. If the charity gave you nothing — no dinner, no tickets, no tote bag — the letter must say so explicitly. Words like “donation” or "thank you" or "acknowlegement" or “gift” are not enough. The required language is simple: “No goods or services, in whole or in part, were provided in exchange for this contribution.” Silence on this point will cost you your deduction. If the charity DID give you something in return for the donation, it must be described and include an estimate of the value of what you received. For example: “Two gala dinner tickets with an estimated fair market value of $150 were provided in return for your charitable donation of $500”. For contributions to religious organizations or houses of worship, a statement to the effect of such goods or services consist solely of "intangible religious benefits" is often appropriate in this part. Close Is Not Good Enough In many areas of tax law there is a concept called substantial compliance — meaning if you got close enough, the IRS would cut you some slack. That doctrine does not apply here. The CWA requirements are strict, and a deduction will be disallowed in its entirety if the letter falls short — even if the donation was completely genuine and legitimate, like our couple from Utah. Before You File — Make sure everything is in order If you have made a significant charitable contribution and are not certain your acknowledgment letter meets the IRS requirements, contact the qualified charity before you file. It is far easier to get a revised or re-worded letter from the charity before your return goes in than to fight the IRS afterwards. If you've received an IRS letter or notice that and you're not sure what to do next, contact my office today for a consultation. Kevin Rego Law Office of Kevin Rego 650.933.5222 Disclaimer: The information provided is intended to provide a general overview of the topic presented at the time of publication. Tax laws change and you should always consult a tax professional for the latest tax law. This article is not intended to be a legal interpretation of your individual tax or legal situation. If there is a conflict between the information provided and any legal authority implementing or interpreting the topic, the legal authority shall prevail. Always seek legal advice from a licensed attorney. This article does not in any way establish an attorney-client relationship. That relationship can only be accomplished with both parties signing a mutual, written agreement.
It starts with a simple envelope. It looks official, perhaps even polite. You see the Internal Revenue Service return address, feel that familiar jolt of anxiety, and tuck it into a kitchen drawer to deal with "later." But in the world of IRS collections, that envelope is not just a bill; it is the first trigger in a sophisticated, automated sequence designed to escalate until the government gets your attention! Most taxpayers believe the IRS can suddenly decide to freeze a bank account or garnish a paycheck willy nilly. The reality is much more methodical. The IRS follows a very specific roadmap of notifications, and understanding where you are on that map can be the difference between a simple payment plan and a financial disaster. Phase one is the Notice of Tax Due and Demand for Payment, often a letter with the title CP14. This is your early-warning signal. At this stage, the tone is relatively firm but professional. The IRS is giving you nudge--"hey, you may have forgotten about this bill". If you act here, you have the most leverage and the most options. Paying the bill or investigating collection alternatives are wide open. If that letter goes ignored, the sequence shifts. You will likely see the CP501 or CP503. These are formal reminders, but the temperature is rising. By the time the CP504 Intent to Levy lands in your mailbox, the IRS is no longer asking; they are telling you that they have the legal right to seize your property or income. This is the final stage of the "urgent" phase before you enter the "emergency" phase. The "gloves come off" and everything changes when you receive the Final Notice of Intent to Levy and Notice of Your Right to a Hearing. This letter is your last line of defense. It includes Form 12153, which allows you to request a Collection Due Process (CDP) hearing. Filing this appeal is often the only way to legally halt the collection machine and force the IRS to sit down at the negotiating table. If you miss the 30-day window following this letter, the IRS is legally cleared to start taking your money. There are some legal options that are still open with an equivalency hearing request, but that carries less "punch" than a CDP request. The most important thing to remember is that the IRS collection process is a series of escalating steps, not a single event. Addressing the issue in the early stages is always the best answer. IRS letter and notices are written in a dense, technical language that can be difficult to decode. If you have received a letter from the IRS and you don't know exactly what it means or how much danger you are in, please contact me today. I can send you a "tax letter translation" to help you understand precisely where you stand in the process and how we can work together to stop the letters for good. --- If you've received notice that your tax debt has been assigned to a private collection agency and you're not sure what to do next, contact my office today for a consultation. Kevin Rego Law Office of Kevin Rego 650.933.5222 Disclaimer: The information provided is intended to provide a general overview of the topic presented. It is not intended to be a legal interpretation of your individual tax or legal situation. If there is a conflict between the information provided and any legal authority implementing or interpreting the topic, the legal authority shall prevail. Always seek legal advice from a licensed attorney. This article does not in any way establish an attorney-client relationship. That relationship can only be accomplished with both parties signing a mutual, written agreement.