Failure to timely file tax returns and pay the related tax is a very serious situation that must be handled sensitively with the IRS and the applicable state and local municipalities to which these tax returns were due for filing. Depending on the taxpayer’s situation, however, there are likely many options available to resolve the filing and payment delinquencies and avoid any criminal prosecution or investigation. Many taxing authorities have voluntary disclosure programs and amnesties that will allow taxpayers to come in and correct their past mistakes. Many of these programs also provide incentives to encourage taxpayers to come in and file these delinquent returns. These incentives include reduced or eliminated delinquency penalties. Also, depending on the situation, a taxpayer may qualify for a penalty abatement related to the delinquent filing and/or payment. Due to the criminal undertones related to failure to file tax returns, it is absolutely imperative that taxpayers handle these situations very sensitively. The most important thing for taxpayers to do when they find themselves in the situation is to contact a tax attorney to assist them in evaluating all of their options. Set forth below is a brief explanation of some of the voluntary disclosure programs that are available and the standards for penalty abatement.
The IRS still has its 2012 Offshore Voluntary Disclosure Program open to assist taxpayers who have failed to file required international disclosure forms including the foreign bank account report (FBAR) and other international disclosure forms (i.e., IRS Form 5471, IRS Form 8865, IRS Form 926, etc.). Under the 2012 Offshore Voluntary Disclosure Program (OVDP), taxpayers can voluntarily disclose their failure to file these international returns and in exchange the IRS will agree to forego assessing the taxpayer with the very punitive international penalties. Specifically, in lieu of the very substantial international delinquency penalties, the IRS has agreed to assess a flat OVDP penalty of 27.5% of the taxpayer’s highest account balance or foreign asset value during the disclosure period (this percentage can be lowered to 5% or 12.5% depending on the taxpayer’s specific situation and foreign holdings). Additionally, in exchange for voluntarily entering into this program, the IRS will not criminally prosecute the taxpayer.
In addition to the IRS’s Offshore Voluntary Disclosure Program, there is a normal voluntary disclosure that can be made pursuant to the IRS’s Voluntary Disclosure Policy that is described within the Internal Revenue Manual. Under the normal Voluntary Disclosure Program, a taxpayer can disclose his or her failure to file and/or pay the required taxes with the IRS Criminal Investigation Division. If this disclosure is made in the proper manner, a taxpayer can avoid any criminal investigation and/or prosecution related to their failure to file and/or pay taxes. Here again, however, the taxpayer must be certain to follow the requirements for this disclosure.
The State of Ohio also has a Voluntary Disclosure Program available for delinquencies related to individual income tax return filings. Specifically, if a taxpayer has not been previously contacted by the State related to their delinquent tax returns, taxpayers can make a voluntary disclosure to the State of Ohio. In exchange for the taxpayer’s disclosure of his/her failure to file tax a return, the State agrees to forego assessing the very substantial penalties that otherwise would be imposed against their delinquent tax returns and limits the number of delinquent returns that must be filed. This is a huge savings to Ohio residents who have delinquent tax return filings.
Many taxpayers who have not filed tax returns for years find it difficult to start the process of getting the returns prepared. Many do not have copies of the records necessary to get these returns filed. One way to ease the burden of gathering records necessary to file returns, is to request copies of the “Wage and Income Transcripts” from the IRS. These transcripts contain a listing of all the W-2s, 1099s, and 1098s that were filed under the taxpayer’s social security in any given tax year. Generally, these transcripts are available for the last 7-8 years.
If you find yourself in the situation where you have not filed tax returns in many years and you would like to correct this problem, please contact the attorneys at Terrence A. Grady & Associates to discuss your options for correcting these delinquencies.