Unless you’ve been living under a rock, you’ve probably seen all the news stories revolving around Real Housewives of New Jersey stars Teresa and Joe Guidice. The reality TV celebs were recently sentenced to 15 and 41 months in federal prison respectively following their convictions on multiple fraud charges, including tax fraud. Their case is a prime example of what not to do when it comes to dealing with the IRS and we’ve got the biggest tax lessons to take away from their situation.
One of the most glaring issues in the Giudice case centered on the fact that Joe Giudice reportedly failed to file a tax return on nearly $1 million in income earned between 2004 and 2008. If you’ve crunched the numbers and find out that you owe taxes, you can’t just skip out on filing a return. Once the tax filing deadline passes, the IRS starts piling on the penalties for what you owe.
The failure-to-file penalty starts off at 5 percent of the total tax due and it accumulates for every month or partial month your return is late, up to a maximum of 25 percent. There’s also a separate failure-to-pay penalty of 0.5 percent that begins racking up. This penalty offsets the one for late filing but altogether, you could still end up having to fork over penalties totaling 47.5 percent of your original tax bill. On top of all that, you’ll also get stuck paying interest on the liability.
Even if you don’t owe and you’ve got some money coming back to you, it doesn’t mean you can afford to put off filing. The IRS gives you three years from the tax deadline to get your return in and claim your cash. You won’t owe any penalties in this situation but if you drag your feet for too long, you run the risk of forfeiting your refund altogether.
In addition to uncovering the Guidices’ failure to file their tax returns, the court also found that they still owed an estimated $224,000 in back taxes. While the penalty for failing to pay isn’t as high as the one for failing to file, the consequences of not coughing up the cash can be much stiffer.
While it may take them some time to get around to it, the IRS will eventually take notice of the fact that you haven’t paid. Once that happens you can expect to begin receiving collection letters advising you that there’s a balance due. If you continue to ignore these notices, things can take a serious turn for the worst.
As long as you’ve been appropriately notified about your tax liability, the IRS can take a variety of collection actions, including:
The longer the liability goes unpaid, the more severe the consequences become so it’s to your benefit to address an unpaid tax bill in a timely manner.
There’s a difference between not being able to pay your taxes and deliberately taking steps to dodge them, something that Joe and Teresa Giudice are learning the hard way. The IRS takes tax fraud very seriously and while only a relatively small number of taxpayers are convicted on tax-related charges each year, it’s not something you should just brush off.
In situations where the government determines that you actively and willfully sought to avoid paying taxes by underreporting income or failing to file a return, time in jail is a very real possibility. Currently, the maximum sentence for tax fraud runs between three and five years, based on the offense. In addition to earning yourself an orange prison jumpsuit, the IRS can also impose a penalty of up to $250,000, depending on the type of fraud involved.
As the Giudices prepare to serve their prison sentences, it’s a harsh reminder that it doesn’t pay to try and cheat Uncle Sam. You’ll have to face the music at some point so you’re better off tackling your tax problems before the IRS shows up on your doorstep. Contacting a qualified tax professional is the first step to getting on the right track.
This post was published on November 3, 2014