Fear of Filing: IRS Deterrents to Filing Late Returns

By Julian Block, attorney and former IRS investigator

The law empowers and encourages the Internal Revenue Service to make life decidedly disagreeable for persons who intentionally fail to file their returns at tax time. The key federal statute is the Internal Revenue Code, which authorizes the imposition of severe sanctions, both criminal and civil, on those who fail to comply with our "voluntary" system.

First, consider the provisions for criminal offenses. The one most frequently invoked, Code Section 7203, makes willful failure to file a misdemeanor punishable by a fine of as much as $25,000 and a jail sentence of up to one year, or both, plus the costs of prosecution.

For more serious situations, the federal government has the option to bring charges under Section 7201 for willful evasion. This offense is a felony, the punishment for which is a maximum fine of $100,000 and five years in prison, or both, plus prosecution costs.

Because of budget constraints and crowded court dockets, relatively few taxpayers are subjected to criminal prosecutions. So let's look next at what the IRS routinely does: slap nonfilers with civil penalties. Those severe, nondeductible penalties are in addition to nondeductible interest charges.

Under Section 6651, the IRS can exact a late-filing penalty -- generally, 5 percent of the balance due for each month, or part of a month, that a Form 1040 is overdue. The maximum penalty is 25 percent of the balance due (the amount that remains unpaid after subtractions for taxes previously paid through withholdings from wages and quarterly payments of estimated taxes).

An example: A balance due of $10,000 means a penalty of $500 a month and as much as $2,500 for a more-than-four-months-tardy return.

The severity of the penalty escalates considerably when the IRS accumulates suffficient evidence to establish the late filing is due to fraud, in which event, the Section 6651 penalty jumps from 25 to 75 percent.

To escape responsibility for civil fraud penalties, taxpayers frequently contend that the first failure to file caused their later failures to file. How come? Because submitting returns for subsequent years would reveal their initial nonfiling to the IRS, which then would press criminal charges -- an argument that leaves the courts unmoved.

For instance, the Ninth Circuit Court of Appeals refused to attach any significance to the underlying fear of a criminal prosecution. To do so, observed the court, would "open a Pandora's box of illusory defenses to the fraud penalty."

Besides the late-filing penalty, the IRS can assess a late-payment penalty, which, as a general rule, is one-half of 1 percent of the unpaid amount for each month, or part of a month, up to a maximum of 25 percent. However, when the IRS assesses penalties for both late filing and payment, one partly offsets the other.

On top of penalties for late filing and payment, you are liable for interest from April 15 on the balance due. Even worse, forget about any deduction for interest on overdue taxes. To further twist the knife, the IRS charges interest on the penalty for late filing, but not the one for late payment.


Julian Block is an attorney and former IRS investigator who has been cited by the New York Times as "a leading tax professional" and by the Wall Street Journal as an "accomplished writer on taxes." His “Year-Round Tax Savings” shows how to save truly big money on taxes – legally – and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. To order the publication, send $9.95 for a printed copy or $8.95 for an e-mail version to:
J. Block
3 Washington Sq., #1-G
Larchmont, NY 10538.

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