The IRS can identify a taxpayer who failed to file required returns by reviewing information returns filed by third parties, including Forms W2, Forms 1099, Schedule K1s, Forms 1098, and other information. If the IRS determines that a taxpayer’s income exceeds the filing threshold, and no corresponding return for that year has been filed, the IRS will notify the taxpayer and request the return. If the taxpayer continues to ignore their filing requirement, the IRS can file a substitute for return and assess the tax, penalties and interest the IRS believes is due. If you haven’t filed for several years, you run the risk of criminal prosecution – willful failure to file returns is a misdemeanor under federal and state law.
Many taxpayers choose not to file because they do not have the funds to pay the tax due, or because they haven’t filed in prior years and are scared to come into compliance. To the contrary, filing a current year return, regardless of whether a taxpayer can pay, can avoid substantial failure to timely file penalties, demonstrate good faith, and possibly avoid criminal exposure. Taxpayers that have fallen out of compliance should contact a qualified tax professional to discuss their options and the best strategy for coordinating this year’s tax obligations.