Procrastination

All of us procrastinate. But some take things to dangerous extremes -- putting off the filing of tax returns for a few years, or even many years. The IRS estimates that each year some ten million people fail to file their tax returns. Nonfilers, as the IRS calls them, face both criminal and civil problems that can be resolved if addressed, but which can bring imprisonment and financial ruin if ignored.

As its computer capabilities improve, the IRS is becoming increasingly adroit at finding and pursuing nonfilers. So while the IRS may not have found you yet, sooner or later they will. When it happens, the IRS can make tax assessments on its own using its "substitute for return" procedures, or it can prosecute you for willful failure to file (a misdemeanor carrying a maximum sentence of one year in prison for each tax year), or for tax evasion (a felony carrying a maximum sentence of five years in prison for each tax year).

Prosecution of nonfilers

Investigations of nonfilers are handled by the IRS Criminal Investigation Division (Mr. Haynes was a Special Agent in the Baltimore office of the Criminal Investigation Division). People are prosecuted for failure to file or for tax evasion by the IRS not because it is the easiest or cheapest way to collect the tax, but because making an example of a few people puts the fear of God (or at least the fear of the IRS) into the rest of the taxpaying public. For those poor souls who get caught up in this process, it can destroy families and careers. Proper representation is an absolute necessity.

Voluntary disclosure policy

In many cases, if the problem can be addressed before an IRS criminal investigation has been started, it is possible to use the IRS's "voluntary disclosure" policy to get the missing returns filed and avoid prosecution. This policy has been around for decades, but the IRS from time to time changes the rules of the game. Indeed, the most recent change was announced on December 11, 2002. Any returns filed pursuant to the voluntary disclosure policy must be fully accurate and truthful. If the IRS determines that even the late filed returns are false, the chance of criminal prosecution is greatly increased. The IRS's voluntary disclosure policy applies to a taxpayer who does the following:

• voluntarily informs the IRS of his failure to file for one or more years;
• had income from only legal sources;
• makes the disclosure prior to being informed that he is under criminal investigation;
• files a correct tax return or cooperates with the IRS in ascertaining his correct tax liability; and
• makes full payment of the amount due, or if unable to do so, makes bona fide arrangements to pay.

In these situations it is crucial to move quickly and correctly. If done right, the problem can be resolved. But done wrong, your actions can actually increase the chances of being prosecuted, convicted and sent to prison.

Don't have the money to pay?

Please understand that not having the money to pay the tax is NOT a valid excuse for not filing. Indeed, if it can be shown that you decided not to file for this reason the IRS will use this evidence to prove that you knew you had to file, and that your decision not to file was "willful."

Not having the money to pay should similarly not be allowed to keep you from correcting the problem before it is too late. We can deal very effectively with cases in which clients just don't have the money to pay their taxes. But it is easier for us to communicate with them when they are at home or at the office, rather than having to visit them in federal prison because they waited too long to address the problem. Even if you are prosecuted, the IRS will be waiting for you when you get out, and you will have to deal with the collection aspect of the case anyway.

Attorney-client privilege

Please keep in mind that potential criminal cases require the participation of an attorney. Federal and state law recognize an accountant-client privilege, but these privilege or confidentiality rules are entirely inapplicable in criminal cases. Only the attorney-client privilege holds up in a state or federal criminal case.

WANT MORE INFORMATION?

Healing Self-Inflicted Wounds -- Representing Nonfilers, published by the Maryland Society of Accountants in "The Freestate Accountant" as part of Mr. Haynes' series on "Dealing with the IRS Collection Division."

Tax Fraud Investigations -- A Procedural Roadmap, written by Mr. Haynes for the "Corporate Criminal Liability Reporter."

Revised IRS Voluntary Disclosure Policy (Dec. 11, 2002).