Sam Brotman, JD, LLM, MBA July 2, 2020 11 min read

The Consequences of Running From The IRS

 

The consequences of running from the IRS are specific to federal tax laws that govern the ability of the agency to pursue and recover tax funds as well as those tax laws that govern your response to notices of tax deficiency.

It is important to understand that the statute of limitations for taxes never runs out. Specifically, “[t]he IRS has no time limit if you never file a return or if it can prove civil or criminal fraud” (Wood, “Even the IRS Has Time Limits,” 8/15/2013). However, it has up to three years from the due date of the return to pursue action against you. If you file your tax return late and do not require an extension, the statute will run three years from the date you filed your return late.

There are exceptions to this three-year rule. If you substantially understate your income, then the statute runs six years. “Generally this means you’ve left off 25 percent or more of your gross income, but exactly what that means is currently the subject of litigation.

 The IRS is now arguing in court that anything on your tax return that has an effect of a 25 percent understatement of gross income[1] gives it an extra three years” (Wood). In essence, the IRS wants six years to review over-statements where you understate the basis of tax.

Taxpayers are subject to time limits. For example, taxpayers wanting to amend their tax returns must do so within three years of the original filing date. However, there are consequences and limits to amending tax returns. “You might think that amending a return restarts the three-year statute, but it doesn’t. 

However, where your amended return shows an increase in tax, and you submit the amended return within 60 days before the three-year statute runs out, the IRS has 60 days after it receives the amended return to make an assessment” (Wood). This provision offers a window of planning opportunity, but it also provides the taxpayer with a greater chance of incurring a tax liability.

The consequences of running from the IRS are lastly extended to tax evaders. Tax evasion is a serious tax crime. Tax evasion is simply the willful avoidance, or evasion, of paying taxes owed. 

Taxpayers guilty of tax evasion have been found to misrepresent the true state of their financial affairs by understating or underreporting income and/or by overstating deductions. The goal in this sense is to reduce one’s tax burden. However, the IRS views this goal as criminal. 

Taxpayers (i.e., individuals, corporations, and trusts) may fail to file tax returns, divert income offshore and/or file amended returns. The penalties for tax evasion may include jail time, a prison sentence and hefty fines.

The consequences further are extended to two categories of penalties[2]: failure-to-file penalty and failure-to-pay penalty. If you do not file by the deadline, then you can expect to pay a failure-to-file penalty. “The penalty for filing late is usually five percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes[3]” (IRS.gov, “Failure to File or Pay Penalties: Eight Facts,” 8/16/2013). 

On the other hand, if you fail to pay your filed tax return, then you can expect to pay a failure-to-pay penalty. “If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of one-half of one percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid” (“Failure to File or Pay Penalties: Eight Facts”). 

Similar to failure-to-file, the failure-to-pay penalty may reach as high as 25 percent of your unpaid taxes. Extension requests may increase your tax penalty liability. In some cases, if you can prove reasonable cause[4], you may not have to pay either the failure-to-file penalty or the failure-to-pay penalty, provided that your failure was not due to willful neglect.

1] Most court decisions today conclude that “overstating deductions is not the same as omitting income” (Wood).

[2] Types of IRS Penalties are discussed at the end of the previous chapter.

[3] If a taxpayer files a return more than 60 days after the due date or even the extended due date, the minimum penalty will be “the smaller of $135 or 100 percent of the unpaid tax” (IRS.gov, “Failure to File or Pay Penalties: Eight Facts,” 8/16/2013).

[4] The subject of reasonable cause is further discussed in Chapter 5: Penalties and Interest.

Psychological Effect of IRS Collections

Achieving financial stability should be a lifelong goal. Developing financial plans and meeting long-term objectives is a lengthy process that requires patience, discipline and endurance. What happens when your plans are disturbed because of past and present financial issues that threaten to destroy your future? Bankruptcy is one of those financial problems that takes into consideration your past, your present and your future.

What you have done with money up to this point will dictate, in essence, how money will be distributed from the income you bring in. Now you must develop a debt repayment plan and lose a significant percentage of your income to repaying old debts. 

Now you are also tasked with the goal of developing a debt repayment plan. The process of repaying debt, experiencing wage garnishment and entering bankruptcy can have a psychological effect that may prove just as long-lasting as the financial problems you have at the moment.

In a U.S. News article, Daniel Bortz discusses the idea of surviving the emotional toll that bankruptcy brings. Filing for bankruptcy has wide-reaching effects because it can cause stress on relationships and be traumatic for all parties involved. 

“The focus is often on the financial steps — compiling a comprehensive list of debts, hiring an attorney, seeing the case through — but neglecting the emotional aspect can have long-term consequences. Many people who turn to bankruptcy have juggled their debt for so long that they’re emotionally exhausted by the time they’re read to file” (Money.USNews.com, Bortz, “Surviving the Emotional Toll of Bankruptcy,” 8/17/2013). Because the problem is more internal, self-esteem takes a greater hit than the finances. It is truly embarrassing to deal with financial problems because they reveal much about how we handle money — our belief systems, habits and lack of knowledge in the area.

A money crisis is taxing on the mental state. This is especially significant for filers of bankruptcy. “Filers may be concerned they have accumulated so much debt that bankruptcy will not offer relief, worry what their family thinks about the situation, or assume their credit score will be permanently destroyed. 

Such misguided beliefs build anxiety and fear and only make the process more taxing” (“Surviving the Emotional Toll of Bankruptcy”). Bankruptcy is still a viable option, but the judgments and disapproving looks of family members may create such a black mark in the mind that it affects you psychologically.

To navigate through this grief, just remember that a bankruptcy stays on the credit report for 10 years. Do not look at this in terms of length of time. Instead, look at it in terms of 10 years of good financial planning as a tool for overcoming this major hurdle in your life.

Receive the Best of
Brotman Law

Get this topic delivered straight to your inbox.

Book an Action Plan
avatar

Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

COMMENTS

BECOME AN INSIDER

Our best stuff: secrets, tax saving tools, and tax defense strategies from the braintrust at Brotman Law.

  • Expanded benefits during your first consultation with the firm.
  • Priority appointment scheduling and appointment times.
  • Complementary access to our firm’s concierge services.
  • Receive updates and “insider only” tax strategies and tactics.
  • And many more benefits.

Not Sure Where to Start?

Step 1 Start Here

Start Here

These ten big ideas will change the way you think about your taxes and your business.

Start Here

Step 2 Learn About Your Situation

Learn About Your Situation

Find the articles and videos you need to make the right tax decisions in the learning center.

Visit the Learning Center

Step 3 Explore Our Services

Explore Our Services

It is not just about what we do, but who we are, why we do it, and how that benefits you.

View All Services

Step 4 Get Your Game Plan

Get Your Game Plan

Meet with us to outline your strategy. No further obligation, 100% money-back guarantee.

Book an Action Plan