Substitute for Returns
The IRS has the ability to prepare and file returns for you if you choose not to file (Internal Revenue Code 6060). This is commonly known as an SFR. In most cases, it is a disadvantage to have the IRS do this. Typically, the IRS will allow you one exemption, no dependents, and only allow the standard deductions on the return they file for you. Furthermore, the IRS will calculate your tax liability for you, usually from your W-2s and 1099s. The IRS may also impute income to you based upon tabled furnished by the Bureau of Labor Statistics showing the income necessary to sustain the lifestyle in your community. This can result in a much higher tax bill than you would have had if you or a professional prepared your return.
If the IRS prepares an SFR, it will mail it to your last known address asking you to sign it and return it. It may not be in your best interest to sign such a return and if this does happen to you, you should contact a tax professional immediately.
Very few people are put in jail for not filing a tax return, but it does happen occasionally. A willful failure to file tax returns is a misdemeanor if you owe taxes. You can be sentenced for up to a year in jail and a $25,000 fine for each year of non-filing (Internal Revenue Code 7201). If you failure to file is deemed to be part of a scheme to evade taxes you can be charged with a felony, a more serious crime, which carries a maximum punishment of five years and more sever monetary penalty. The felony crime requires a deceitful act beyond the non-filing, such as using a fake social security number. Non-filers may be contacted by the IRS Criminal Investigation Division, or CID. This does not mean that you will be prosecuted, but you still should get your past due returns prepared and filed. In deciding whether or not to prosecute a non-filer, the CID considers many factors, such as:
- The number of years you haven’t filed
- The amount of taxes due
- Your occupation and education
- Your previous history of tax delinquencies
- Whether or not you are involved in a business that deals with large amounts of cash