Failure to File and Failure to Pay: Don’t Confuse the Two

In the course of my practice I repeatedly meet clients who have failed to file their income taxes because of their inability to pay (or full pay) their income taxes. In my experience, this is always a big mistake. This is because when a non-filer finally makes the decision to get back into “compliance,” (i. e., to get current in his or her tax filings and payments), the IRS invariably is far more hostile, demanding and uncooperative with a non-filer than with a taxpayer who has filed, but simply not paid (or full paid) their income tax debt. What accounts for the difference? The non-filer has failed in his or her most fundamental responsibility: to file a tax return. To the IRS, the inability to pay (or full pay) your tax is absolutely no excuse for the failure to file a tax return. No ifs, ands or buts.

Internal Revenue Code (IRC) Section 6011(a) reads as follows: “When required by regulations prescribed by the Secretary any person made liable for any tax imposed by this title, or with respect to the collection thereof, shall make a return or statement according to the forms and regulations prescribed by the Secretary. Every person required to make a return or statement shall include therein the information required by such forms or regulations.”

If you notice, the ability to pay (or full pay) the tax is nowhere mentioned. If you are LIABLE for any tax you SHALL make a return. The IRC provides further evidence that in the mind of the IRS, not only are filing and paying separate and distinct concepts, but of the IRS’s relative emphasis on the importance of filing over paying. IRC Section 6651 reads in pertinent part as follows:

“IRC 6651(a) Addition To The Tax

In case of failure-

6651(a)(1)  

to FILE any return on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percentfor each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate;    

6651(a)(2)  

to PAY the amount shown as tax on any return specified in paragraph (1) on or before the date prescribed for payment of such tax (determined with regard to any extension of time for payment), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate[.]”

The addition to tax for failing to FILE a return is 5% (five percent) of the amount of the tax each month, up to a maximum of 25%. The addition to tax for failing to PAY is 0.5% (one-half percent) of the amount of the tax, up to a maximum of 25%. While the same 25% limit applies in each case, the failure to FILE penalty grows at a rate ten times faster that the penalty for the failure to PAY. Got the message?

I have been assisting clients get into compliance for some 23 years now. Virtually without exception, the attitude of the IRS is aggressive, sometimes hostile, and uncooperative until the taxpayer gets into FULL compliance. So if you have not filed your returns for 10 years, this means filing the delinquent returns for ALL TEN YEARS, not 9, not 8 … but for all ten. Once all delinquent returns are filed, and the focal point of the case turns to collection of any unpaid tax, the attitude of the IRS noticeably changes for the better. Furthermore, once the taxpayer is in full compliance (and not before), the taxpayer can start to engage in negotiations and discussions with the IRS for monthly payments or even the highly sought after “Offer in Compromise” whereby entire delinquent tax debts are paid off at a discount.

So file those delinquent returns, enjoy a more cordial relationship with the IRS, and who knows, you may even be eligible for an Offer in Compromise.