Tips for Non-Filers: How to Improve Compliance with IRS Programs

The Internal Revenue Code outlines and identifies individuals and businesses who have a tax obligation to report income. A preeminent provider of news for tax and accounting professionals* published an article last year regarding the growing problem of tax compliance and the ways in which the IRS was developing strategies to crack down on non-filers. Whether they are individuals or businesses, these efforts are meant to fix the problem of non-filers by getting them to meet their tax obligations.

In life’s journey, there are certain situations that occur which force some individuals and businesses to veer from their intended financial and emotional path. These could include health problems, loss of a job, death, divorce, or some other family issue. Sometimes in the midst of these life-altering moments, taxpayers fail to meet their annual tax filing

obligations; this brings with it several consequences that can add fuel to the fire of an existing bad situation.

Contractors whose companies are pass-through entities should be aware that the profits and losses from their corporations must be reported on their individual returns. Pass-through entities include Single Member LLCs, Partnerships, and Sub-Chapter S Corporations, and for all of these types of business structures, the corporate taxes can affect the owner’s personal taxes.

Consequences of Not Filing Taxes

1. Forfeited Tax Refund

The United States Internal Revenue Code (IRC) established the Refund Statute of Limitations (RSED) which limits the time a taxpayer has to request a refund. The stated limits are three years from the tax filing due date or two years from the time when the tax was paid. If the taxpayer misses this deadline, they will forfeit the refund request on their returns.

2. Penalties and Interest Imposed

If upon completion of the taxpayer’s individual tax returns there is a balance due, penalties and interest will be imposed. The Failure to File penalty is 5% monthly, with a maximum of 25% of the tax liability. The Failure to Pay penalty is 0.5% monthly up to 25%. There may also be an additional Failure to Pay penalty if quarterly estimated tax payments are required by the taxpayer, but not paid. To avoid these penalties, the taxpayer should pay at least 90% of the current year’s tax liability or 100% of the previous year’s tax liability. The IRS imposes interest on both the tax liability and the penalties imposed. The interest rate charges varies as they are revised regularly by the IRS.

3. Substitute for Returns

In some instances, the IRS will use the information available to them to file returns on behalf of the taxpayer. This is typically not in the best interest of taxpayer as there may be credits the taxpayer is entitled to that the IRS either is not aware of, or will overlook. If the filing of the substitute returns result in a tax liability, the taxpayer will receive a “Demand for Payment” letter, and if there is no response to the letter, a lien will be filed on the taxpayer.

Ways to Get Compliant

Here are a few things you can do if you become aware of any years when you had a filing requirement, but you did not file a return:

1. Obtain all the required tax documentation for that time period, whether for one year or a number of them. This may include a profit and loss statement or your K-1s form from your corporate tax returns. If you have not filed your corporate tax returns for that year, then these returns must be prepared and filed before you can proceed with filing your current tax returns.

2. If the tax documentation is not in your possession, contact the issuing company and/or organization to request a copy of the document, which they had reported to the IRS and/or State Revenue/Taxation and Finance Departments. This is the best alternative.

3. If the tax documentation is still not available, request wage and income transcripts from the IRS and State(s) Revenue/Taxation and Finance Departments. For corporate returns, the company’s financial statements will be required. The company’s owner(s) and/or shareholder(s) are responsible for getting them created. They can generate the financials themselves or hire a professional to create the financials.

4. If you, as an individual or business owner, are having issues obtaining the required tax documentation, seek a tax professional to assist in obtaining the documentation and preparing the tax returns.

As the IRS continues to push for compliance programs that get non-filers to fall in line, they keep on investing in people, technology, and infrastructure that can help them strategically enforce the law and make certain that non-filers from prior years begin complying and paying their fair share of taxes. By following the steps outlined here, you can address any unfiled tax returns in the most straightforward way possible and get back in compliance with the IRS as soon as possible.

*Source: Thomson-Reuters, March 2024