Right now the city of Philadelphia has about $1 billion in back taxes and tax amnesty programs in general have helped many state and city governments recoup taxes they may have never received. In December of last year, Keith Richardson, the Philadelphia Revenue Commissioner stated the city would most likely give delinquent taxpayers 45 days to pay their taxes without penalties and only half the interest that has accrued. What happened is that Philadelphia decided to give a longer tax amnesty than 45 days. The program started on May 3rd and ends June 25th, 2010.

Whether you have City, State, or Federal tax debt or unfiled taxes, it is in your best interest during these economic times to come into compliance with tax authorities as interest and penalties will only increase your balance and make things worse.  To find more information about this tax amnesty, visit www.phillytaxamnesty.com today.

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What the IRS Can Do

• Tax Felony Charge: Worst case scenario, the IRS can charge penalties up to $100,000 and can send an individual to prison for up to 5 years for unfiled taxes. This can happen if you are charged with a felony for not filing your taxes. This is a very rare occurrence and will likely only happen if there was something very deceitful that was done in order to evade taxes.
• Other Worst Case: This is more common than getting charged with a felony, but still very rare. The IRS can charge a penalty up to $25,000 for each year of unfiled taxes and can send the taxpayer to prison for 1 year for each unfiled tax return. If the IRS actually sent each person who didn’t file their tax returns to prison for one year, the US would have to increase their jails by 10,000% in order to house all the inmates. The IRS mainly sends individuals to jail to set an example, which is mainly why they go so hard after celebrities. The IRS likes to use the fear tactic on the US and they know that if they put a celebrity in jail it will get highly publicized and will help ensure people file their taxes.

What Will Likely Happen

• Common Tax Fraud Charges for Unfiled Taxes: When you have not filed your taxes with the intent of committing tax fraud, the IRS will typically triple the normal penalties for not filing your taxes. The IRS will charge 15% a month that the taxes remain unfiled and up to 75% of the total tax bill. So if the taxes remain unfiled for 5 months, 75% of the taxes owed will be charged as a penalty. The IRS typically does not go after individuals for fraud, and even if it was fraud it is difficult to prove so the IRS will normally just charge the normal civil penalties which are below.
• Common Civil Tax Penalties: The most likely scenario the IRS will charge the standard failure to file penalty.  The failure to file penalty is 5% a month, which can reach up to 25% of the total tax bill. So if the taxes remain unfiled for 5 months, 25% of the taxes owed will be charged as a penalty.

To top off all these penalties the IRS will also require you to pay interest on the outstanding tax liabilities that is owed. Many people get into trouble with the IRS when they realize that they cannot pay what they owe and they decide not to file. The most important thing for taxpayers to realize is that it is not considered a crime if you cannot pay your taxes, it is only considered a crime when you do not file your taxes. The IRS has an excellent, but slow, system of catching non-filers. It is always a good idea to file tax returns before the IRS sends notices, especially because of their unwritten rule to not prosecute voluntary filers. The IRS will find those taxpayers that have not filed and will charge them steep penalties. The easiest way to avoid these hefty penalties is to file a tax return each year, even if taxes cannot be paid in full.

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The IRS uses a system called The Information Returns Processing (IRP) System. The IRP system collections information from third parties and stores all that information in one massive master file where it will later match up that information with individual taxpayer information that is provided. If you had any income from anyone else it is very likely that it will be reported to the IRS and this is the information the IRS will sooner or later use to track you down for unreported items or unfiled taxes. Most companies that pay you any type of income such as salary, pension, interest, dividends, etc, will require you to provide them with your SSN and tax information before they pay you anything, which is because the IRS requires them to report this information annually. Below are some common third parties that report your information to the IRS.

1. Your employer: If you have a job, your income will be reported by your employer.
2. Brokerage: If you own stocks, bonds, money market funds,etc, all proceeds will be reported.
3. Social Security Administration: If you receive social security benefits this information is sent to be stored in the IRS master file.
4. Casino: If you won a large amount of money a casino will likely require you to fill out your information before they pay you out and will later send that info to the IRS.
5. Unemployment: If you received unemployment, this income will be sent to the IRS to be checked off the master list.
6. Business you are a partner of: Are you part of a business? Your K1 information will be reported to the IRS when the business files their annual tax return.
7. Pension Funds: All pension income is reported annual to the IRS.
8. IRA: When you withdrawal from your individual retirement account these amounts are taxable and reported to the IRS.

The above list can go on and on depending upon your situation. It is very likely that you will have at least one company or person that is required to report payments to you over the year and this is the information the IRS will use to eventually find you if you did not file your taxes. It does take time for the IRS to analyze all this data and match off everything, but each year that passes their technology gets better and faster and they have been catching a greater amount of people at an increasing rate.

If you have unfiled taxes it is a good idea to get started right away with getting back on track. Penalties and interest add up very quickly on unfiled returns if you owe money. If you don’t owe money, you only have 3 years to claim a tax refund. So if you ever wondered if the IRS will find out you didn’t file, the answer is yes, it may take time but you can be assured they will be contacting you.

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If you have not filed your taxes for several years here are some general guidelines to follow. It is recommended that you work with a tax professional if possible.

1. Go over your records to determine the years for which you did not file a return. This may take some time, but you must make sure that you are 100 percent accurate. If you do not know for sure, contact the IRS for assistance. Don’t worry about “clueing them in.” Soon enough they are going to find out that you had not filed.
2. Put together your income and expense records for the years that you did not file. Obviously, the more years you missed the more work you will have to put into this process. You can always contact the IRS for wage information, such as past W-2’s. The IRS only keeps your information on file for seven years, so anything older than this may be difficult to find with their help.
3. Are you going to itemize or take the standard deduction? For many, the best way to answer this question is to consider their mortgage and student loans. Since you can deduct interest, most people with a lot of deductions in these two years decide to itemize. Of course, taking the standard deduction is always the simpler of the two.
4. Hire a tax professional to help you prepare your returns. Remember, you need to file one return for each year that you missed; you cannot use the same form for more than one year. You may be tempted to file your own returns, but keep in mind that this is a lot of work. and often leads to errors.
5. Mail your completed returns to the IRS. If you owe money with your returns, no matter how much, attempt to send what you can. This will make your life much less stressful down the line as interest will be much lower.
6. Expect to receive an IRS letter soon enough stating that you owe penalties and interest on your late returns. If you are lucky you will be able to pay what you owe and then move on making sure that you never do this to yourself again. Unfortunately, this does not always work. You may have to contact the IRS about a payment plan, or maybe even submit an offer in compromise if you are eligible.

If you have not filed your taxes for several years the six steps above will help you work towards a solution. It is always recommended that you seek professional unfiled taxes help from a licensed tax professional to ensure everything is done correctly and taxes, interest and penalties are minimized.

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