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The Basics About Non-Filing (Failing to File Tax Return)
Owing taxes ordinarily is not a crime, but not filing when you have a legal duty to do so is a federal misdemeanor, punishable by one year in jail for each delinquent year, plus penalties. But to do that, the IRS must first catch the person, the "non-filer." The IRS is now much better at doing that than in the past—and, because of IRS and State monitoring systems, that track record will likely only continue to improve.

Owing taxes ordinarily is not a crime, but not filing when you have a legal duty to do so is a federal misdemeanor, punishable by one year in jail for each delinquent year, plus penalties. But to do that, the IRS must first catch the person, the "non-filer." The IRS is now much better at doing that than in the past—and, because of IRS and State monitoring systems, that track record will likely only continue to improve.

IRS Monitoring

The IRS, with its vast resources, is a relentless, all-searching government agency. Some people think, "If I just don’t file a tax return, well then the IRS doesn’t have anything to monitor, and I can escape their radar." But the IRS has software—very powerful software—to monitor 250 million people in the United States, and many others abroad who are subject to U.S. income, estate, and gift tax, to ensure that those with a tax liability do, in fact, file and pay their liability.

This software complies various and variegated pieces of information to determine whether you owe a duty to the government to file a tax return. The software will consider, for example, whether a taxpayer has stopped filing returns (or has never filed a return) by comparing information obtained from third parties against IRS records (i.e. 1099s and W-2s).

The IRS takes one’s failure to file very seriously, calling it "a serious threat to tax administration and the American economy." For this reason, in the information age, the IRS continues to strive to harness new technology to better gather and analyze information. The Government Accounting Office (GAO), for example, constantly considers new ways of optimizing information to discover nonfilers. Recently the GAO, in its Report to the Committee on Finance before the Senate, came up with a novel plan of how it would crack down on non-filing businesses. For details, see GAO-10-950 (Aug 31, 2010).

Legal Duty to File and Penalties

Generally, a penalty is imposed for failing to file income, estate, or gift tax returns. IRC § 6651(b). The law imposes a penalty of 5 percent of the amount of the tax due for each month a return is delinquent. IRC 6651(a)(1). However, this penalty caps off at 25% of the total amount of tax due. IRC § 6651(a)(1). Under a very narrow exception where a taxpayer proves that his failure to file was due to reasonable cause and not willful neglect, no penalty will result. IRC § 6651).

California Monitoring

In addition to the IRS’s monitoring software for detecting nonfilers, there are California’s resources. California’s civil and criminal investigation functions bring additional tools to the table to help locate and prosecute nonfilers. To mention just one example, the State compares those holding a State license (a contractor’s license, or an insurance license, for example) with the licensee’s tax returns to discover any discrepancies. California assumes that each person earns the average amount of someone in that profession. Consequently, California has been known to issue proposed assessments based on the income they "expect" an average licensee to be able to earn, and also to prosecute nonfilers criminally once they are found.

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