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Every U.S. citizen and legal resident is obligated by law to not only report their worldwide income, but also to remit taxes on any income regardless of the source or where it was earned. In actuality, even if no U.S. taxes are due in that tax year because of treaties or tax agreements with foreign jurisdictions, you still have a reporting obligation that you must obey. If you failed to put in your required tax return, you should get that done as soon as possible. Nevertheless, one should never blindly rush into a potentially costly tax scenario with the IRS. Enlist the services of an experienced CPA and tax attorney. The right lawyer can help you lower the amount you owe, keep penalties to a minimum, provide unfiled tax return assistance, prevent collateral issues from coming up and potentially lead to a more favorable outcome.
When is a Failure to File Penalty Possible?
Although this question is seemingly simple, it is deceptively so. For starters, for a failure to file penalty to be applicable, you must have an obligation to file U.S. taxes. Whether you are obligated to file is dependent upon your filing status, the federal income tax withheld, and your gross annual income. When it has been established that there was, indeed, a requirement to file U.S. taxes, you can then figure out if a failure to file penalty can apply.
For the most part, a failure-to-file penalty can be assessed when a tax return is not filed by its due date. While this circumstance is simple enough, what happens in a case where a taxpayer files for a time extension? If the extension is applied for a date prior to the return’s due date, a failure-to-file penalty would not apply. On the other hand, if request an extension but you fail to pay a minimum of 90 percent of your actual tax liability by the original due date, you could be subject to a failure-to-pay penalty. If 90 percent or more of the liability is remitted by the original due date and the outstanding balance is paid by the extended payment date, then a failure-to-pay penalty cannot be assessed. Similarly, if you are owed a tax refund by the IRS, no failure-to-file penalty can apply. Nevertheless, your return claiming a refund has to be filed within 3 years of its due date or you forfeit your refund.
An additional concern regarding a failure-to-file is that the statute of limitations does not start to clock for the assessment or collection of taxes until a return has been filed. What this means is that there is essentially no statute of limitations on tax claims if you have not filed.
What Penalties can One Face for Unfiled Tax Returns?
Penalties for failure-to-file taxes re typically greater than penalties for failure to pay taxes. The penalty for filing taxes late is usually 5 percent of the outstanding tax bill for every month or part of a month in which the tax return is late. The penalty is not to be greater than 25 percent of the unpaid taxes. Therefore, should you fail to file on time and file 48 days, you can be penalized for each month or part of month that the monies were late. If your tax filing was due on April 15, 2014 and you failed to request an extension, this means you would have filed on June 2nd. You would be liable for penalties for 3 months since your tax filing was outstanding for all of the month of May and portions of the months of April and June. That said, if your taxes are filed more than 60 days after the original or extended due date, then the penalty is the lesser of $135 or 100 percent of your unpaid taxes.
How Can One Avoid Paying Failure-to-File or Failure-to-Pay Penalties?
A person would be liable for failure-to-file unless they have a reasonable cause for the omission. Nonetheless, willful neglect is not an excuse for your failure to pay your taxes. However the IRS’ interpretation of what it considers to be willful is surprising to the majority of people. According to the IRS, willful action is an act that is a voluntary intentional violation of a known legal duty. Therefore, whether conduct is willful depends upon a subjective mental state. Such a mental state can, and often is, demonstrated through circumstantial evidence including but not limited to conduct, financial transactions, and interactions with your bank. Put mildly, room for misinterpretation of your actions, inaction or statements exists. Where mistakes or failures are repeated, it could become increasingly difficult to explain them away despite the fact that they could have all arisen from the same misunderstanding. When your financial holdings become more numerous and complex, such as in the case of foreign assets, the IRS thinks that you should be reading through government documents to find out what you tax obligations are. That said, as you holdings increase in complexity and amounts, it can become increasingly difficult to avoid a finding of willfulness or even deliberate disregard.
Working with an experienced lawyer who can give you unfiled tax return help would behoove anyone in any of the above scenarios. We can assist you in explaining any oversights. Indeed, it could result in a more favorable outcome than trying to go toe to toe with the IRS alone.
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