September 01, 1992
IRS Plans to Bring Nonfilers
Back Into the Tax System
NONFILERS - A GROWING PROBLEM
While the number of tax returns filed has increased over the
past few years-- 110 million in 1988 to 114 million in 1990-- the number of nonfilers has
gone up, too.
The IRS now estimates about 10 million individuals and businesses may not have filed.
During 1991, the IRS inventories of apparently delinquent tax returns, representing one or
more delinquent returns, increased by nearly 30 percent. The income tax gap attributable
to nonfilers is over $7 billion annually.
WHO ARE THE NONFILERS?
A nonfiler could be just about anyone. IRS research shows
that some nonfilers have relatively low incomes. Most owe small balances and some are even
entitled to refunds.
But other nonfiler situations aren't so simple. Data from an IRS special nonfiler pilot
project found that 64 percent were self-employed. Frequently these were "cash
only" businesses or the taxpayer was an independent contractor with little or no
taxes withheld or estimated tax paid. Often no returns had been filed for the taxpayer's
WHY DON'T THEY FILE?
Failure to file usually starts as a result of a
significant event in the taxpayer's life-- a divorce, death of a loved one, starting up a
new business, or the failure of a business-- or because the taxpayer can't pay what's
owed. Once taxpayers fail to file for one year, fear keeps them out of the system.
WHAT'S THE COST OF NONFILING?
- Interest and penalties accrue on any amount the taxpayer may owe.
- Late filing penalty is five percent per month of the balance due
up to 25 percent.
- Failure to pay penalty is one-half of one percent per month up to
- Interest is also due on the amount owed. Rates change quarterly and the rate beginning
October 1, 1992, is seven percent.
- Refunds must be claimed within three years or they are lost.
- The majority of filed returns are refunds and the average was $968 in 1990.
- Refund returns must be filed within 3 years from the due date of
the return. For example, the refund period for 1988 returns expired last April and it will
run out for 1989 returns unless the taxpayer files by April 15, 1993.
- Loss of other benefits such as tax credits or Social Security payments.
- Many low income taxpayers with children are eligible for the earned income tax credit; a
refundable credit which can be as much as $2,020. But a return must be filed to claim EIC.
- Self-employed individuals who do not file returns may lose credits
toward their social security coverage in retirement or for disability. Self-employment tax
is reported and paid on individual income tax returns. If no return is filed, the
information relating to self-employment tax is not reported to the Social Security
Here are some examples:
A taxpayer who failed to file a tax return for 1988 and owed the average
amount for that year-- $2,263-- would owe the tax plus an additional $2382 in penalties
and interest by Oct. 1, 1992.
A married couple with 2 children and combined
income in 1989 of $36,000, owed an additional $1,024 in tax on their return. But since
they still have not filed, they now face an additional $750 in penalties and interest.
- A self-employment single individual with net earnings in 1990 of
$52,713 would have owed a total of $18,217 in income and self-employment tax. The taxpayer
made quarterly payments totaling $10,000 during the year, but did not file because there
was $8,217 still due with the return. By not filing and paying on time, the total
penalties and interest added more than $4,100 to the existing balance due.
- A single taxpayer failed to file in 1987 because he owed $1,000.
Afterwards he was afraid to file even though he would have received refunds of $900 each
year. The 1987 tax, penalty and interest now total more than $2,340. He lost his right to
his 1988 refund because the statute of limitations has expired but he still can get the
refunds he is due for 1989 to 1991.
WHAT'S THE IRS' PLAN?
IRS plans a program of special assistance and education as
well as direct enforcement steps when necessary.
- Copies of prior year tax forms are available at IRS offices.
- IRS employees have been trained to help taxpayers reconstruct old records, such as W-2 or interest and dividend statements.
- IRS volunteers, including return preparers and other tax practitioners, are sponsoring assistance sites in community areas. Volunteers can help prepare forms and IRS workers can set up payment arrangements at the same time.
- Nonfiling penalties may be waived if there was a reasonable cause.
- Examples of reasonable cause include personal events, such as illness, death of a family member, and fires, natural disasters or other casualties that destroyed records.
- Attach a statement to the delinquent return explaining the reasons why it is late and ask IRS to consider a waiver of the penalties.
- IRS will offer payment arrangements whenever possible.
- Installment payment procedures were recently streamlined.
- In other cases the taxpayer can discuss an offer in compromise.
- Enforcement remains an option of last resort.
- 2,000 IRS agents have been reassigned to contact nonfilers who have been identified through IRS records. The agents will prepare returns for those who fail to file.
- In egregious cases, IRS will recommend criminal prosecution to the Department of Justice.
WILL NONFILERS FACE CRIMINAL CHARGES?
The IRS has never recommended criminal prosecution to the
Department of Justice when taxpayers came forward and made a true voluntary disclosure of failing to file returns and filed accurate returns of their own volition. Nonfilers generally only need to be concerned about talking with the IRS about whether penalties can be waived for reasonable cause and making arrangement to pay the delinquent taxes, interest and any penalties which may apply.
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