If a tax return is not filed by the due date and no extension was filed for the return then the tax return is considered late and unfiled. The most common example is your Form 1040 Return to the Internal Revenue Service. Everybody knows that this tax return is due on April 15th of every year. However you can obtain a six month extension to file the return until October 15th but if you do not file by October 15th then the return is considered late.
PENALTIES
For tax returns that are filed late the IRS will impose a penalty for late filing of the return and this penalty is normally 5% of the unpaid taxes for each month that a tax return is late. This late filing penalty will start accruing on the first day that the return was late but will not exceed 25% of the unpaid taxes.
There is also another penalty that the IRS will impose and that is a penalty for late payment of taxes if taxes are owed when the late tax return is filed. The penalty for late payment of taxes is .5% per month of the unpaid tax up to 25%.
If taxes are owed when you file a late tax return, then the IRS will also charge interest on the unpaid balance. The interest rate is determined on a quarterly basis by the IRS and is the short term interest rate plus 3%. The interest also compounds on a daily basis.
There is no statute of limitations for a tax return that is never filed with the IRS. For example if a taxpayer has never filed their 2007 tax return, then the IRS can go all the way back to 2007 and assess taxes, interest and penalties against the taxpayer for the unfiled 2007 tax return.
TAX EVASION
An unfiled or late tax return may also open a taxpayer to criminal charges for tax evasion. Granted this is usually an extreme situation but the elements to a tax evasion charge are: 1) the willful attempt to evade or defeat the assessment of a tax, and 2) the willful attempt to evade or defeat the payment of a tax [1]
An unfiled or late tax return may also prevent a taxpayer from obtaining a mortgage or even filing for bankruptcy. A bank or mortgage company is required to verify the income and earnings of a taxpayer. This is often accomplished by the bank or mortgage company filing a request with the IRS for a borrower's tax transcript. The tax transcript is the official IRS documentation of the taxpayer's tax return.
An unfiled or late tax return is a serious issue and not only are there monetary issues involved but also potential criminal issues. If you would like more information or would like to discuss any of these issues please contact our Firm.
[1] U.S. Title 26, Section 7201
