The United States has a voluntary income tax reporting system. U.S. citizens, permanent residents, and businesses here must annually file income tax returns with the IRS, reporting their “worldwide income”, deductions, and their “net taxable income”, and pay income taxes to the IRS based on this amount. The rate of tax is “progressive”; that is, it increases as taxable income goes up. There is a minimum level of income for which an annual tax return is not required to be filed and which varies on filing status. For example, in 2016 for a single (unmarried) taxpayer, the individual must generally have at least $10,350 to require a return to be filed for the year. Even if an individual or business has only income they believe may be “exempt” from income tax (e.g. certain social security payments, interest in municipal bonds, etc.), a tax return must still be filed.
Penalties and interest for an unfiled tax return can be substantial and can exceed “credit card rates.” None of the penalties or interest owed on a federal tax debt are deductible.
If an individual has received income from third parties, such as wages or salaries (Form W-2) or dividend, interest, property sale proceeds, or contractor payments (form 1099), the IRS receives this information. If an individual has an unfiled tax return and you fail to report this income, the IRS computer system will identify this non-reporting and begin to send a series of notices to the taxpayer notifying them to file. If you continue to have unfiled tax returns, the IRS will prepare a “Substitute for Return” (a default assessment ) and then the taxpayer will get a tax notice due bill that will come with failure to file penalties and interest. A “Substitute for Return,” however, is not a voluntary tax return, and the associated tax liability cannot be discharged in bankruptcy.
Having an unfiled tax return when an individual or business has sufficient income is a crime “willfully failing to file.” Both the IRS and state departments of revenue prosecute taxpayers for not filing. This is about going prison at this point and the taxes will also be due. Increased failure to file penalties may also apply where not filing is considered to be “fraudulent. Simply not filing a tax return can also be a more serious felony, such as tax evasion, where in addition to not filing, a taxpayer does other “affirmative acts” to evade taxes, such as filing a Form W-4 with his or her employer claiming to be exempt from tax withholding or transferring or hiding assets.
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If your tax return is due and remains as an unfiled tax return, care must be taken on how to address the issue. Any individual with unfiled tax returns must speak with a tax lawyer to understand their options.