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Is the Failure to File a Return a Crime?

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The IRS expects to receive more than 156 million individual income tax returns in 2019, with almost 140 million filed electronically.

 

Some individuals, however, may have failed to timely file a tax return or request an extension of time to file. The IRS’ most recent study, covering 2008-2010, estimated the voluntary compliance rate to be merely 85.5 percent. The IRS estimates that the average annual tax gap (underreported income) for the period from 2008 to 2010 was $458 billion.

 

By failing to timely comply, many non-filers do not realize that they may be committing a crime. In fact, during its 2015 fiscal year, the IRS initiated 223 criminal investigations of non-filers and recommended 164 non-filer cases for prosecution.

 

Internal Revenue Code Section 7203 provides that the willful failure to make (i.e., file) a return and the willful failure to pay tax are separate misdemeanor offenses. Willful failure to file an income tax return is the offense most frequently prosecuted under Code section 7203 and it is punishable by a fine of not more than $25,000 or not more than one year in prison, or both.

 

The elements of the offense are as follows:

• The taxpayer had a legal duty to file a return for the taxable year charged.

• The taxpayer failed to file a timely return.

• The failure to file was willful.

 

NOTE: The IRS does not have to prove there was a tax liability, it only needs to prove that there was a requirement to file. The requirement to file is dependent on the Adjusted Gross Income.

 

The government generally will not prosecute if there is no tax due because willfulness is difficult to prove in that situation and mostly because prosecutors have more compelling cases available.

 

The government establishes willfulness in a Section 7203 prosecution by proving a voluntary, intentional violation of a known legal duty. The legal duty in a non-filing situation is the duty to file a timely return.

 

The relevant analysis is whether the individual voluntarily and intentionally failed to timely file, not whether the individual had the subjective intent to commit a crime. Proof of willfulness is generally circumstantial. Failure to file returns, whether before or after the prosecution years, is admissible evidence of willfulness.

 

On the other hand, the filing of returns in prior years is also evidence of knowledge of the duty to file. Failure to file state income tax returns is evidence of willfulness, as well. Inadequate records and education and experience are also factors considered in the willfulness analysis. A lack of intent to defraud or evade tax does not negate willfulness, because the government need not prove such intent to establish a willful failure to make a return.

 

Generally, therefore, only a good-faith mistake or misunderstanding regarding the requirement to file will prevent a violation of Section 7203. The government considers many factors, though, in determining whether to prosecute a 7203 offense, including the number of years of non-compliance and the amount of the tax loss.

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