What happens if an individual, specifically an attorney, cannot pay their annual income taxes? The IRS advises not to panic and to still file a return without payment. Yes, the agency will assess penalties and interest, but failure to file a return is far worse and could result in large fines, jail time, and even disbarment for attorneys if deemed evasion or fraudulent.
File and Pay What You Can
The IRS encourages all individuals to file a return by the deadline and pay as much as possible. Covid-19 extensions pushed the regular filing date for 2019 returns to July 15, but extended returns are still due on the regular extended deadline of October 15. After filing a return without payment or with little payment, contact the IRS to discuss the amount due. The IRS may be willing to delay collection efforts or provide a short-term extension on payment.
If a hardship is the cause for non-payment, consider filing Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship along with documentation.
Penalties for nonpayment start at 0.5% of the tax owed and start accruing on the date due. These continue each month the tax is unpaid, up to a maximum of 25%. The IRS also charges interest on unpaid balances at the federal short-term rate plus 3%. Interest compounds daily and accrues until the tax is paid.
Penalties Greater for Not Filing vs. Not Paying
If no return is filed, the IRS assesses a failure-to-file penalty that starts at 5% of unpaid taxes each month, 4.5% greater than the failure-to-pay rate, and maxes out at 25%. If both a failure-to-file and failure-to-pay penalty are applicable, the combined penalty is 5% and also maxes out at 25%. The failure-to-file penalty ends after 5 months but the failure-to-pay penalty continues until the tax is paid.
Suspected Fraud Penalized at 75%
Simply failing to file a tax return does not constitute fraud. However, if the IRS suspects that the reason for the failure to file is related to fraud, then the agency will both reach out to the taxpayer to try to determine the reason for not filing and at the same time try to determine the amount of unpaid taxes. The IRS will look at W-2s, 1099s, prior returns, and even search public records for financial information. If after its review the IRS determines non-filing to be fraudulent, the taxpayer is assessed a penalty of up to 75% of the unpaid tax.
If the IRS determines the fraudulent moves to be willful and purposeful, you could be charged with a federal misdemeanor or a felony for what are considered more overt and affirmative actions of evasion. Along with more fines, a conviction in one of these cases can include jail time.
These cases are rare and usually involve large amounts of unpaid tax. In 2017, 584 people were convicted of tax fraud in the U.S., according to the US Sentencing Commission. The median tax loss for these cases was $277,576.
Willful Failure to File Leads to Disbarment
For Georgia attorneys, being charged with tax evasion can result in disbarment. Willful failure to file a tax return falls under the category of illegal conduct considered unfit for a lawyer and subjects the attorney to disbarment.
Attorneys who cannot pay their taxes should at least file a return. Penalties and interest will accrue but individuals can work with the IRS to decrease these and come up with payment plans.
Have Questions? Call the Experienced Tax Attorneys at Wiggam Law
If you can’t pay your taxes or have avoided filing your return, the experienced attorneys at Wiggam Law can help you work through the intricacies of the IRS and negotiate payment plans. Contact metro Atlanta’s top tax and bankruptcy attorneys by giving us a call at (404) 233-9800.