The need non-filers to be in tax compliance

The IRS estimates that more than 7 million individual taxpayers didn’t file a 2014 tax return. The IRS bases this estimate on information statements it received for taxpayers who should have filed but didn’t.

For those individual taxpayers that don’t file yearly information returns, the consequences can be severe. The IRS can examine years that would otherwise be closed if the taxpayer hasn’t filed a return and paid the tax.

How many years back will the IRS look to ensure the taxpayer is in compliance?

The answer lies in a little-known IRS policy statement.

Policy statements form the basis for procedures and instructions on how the IRS will operate programs and activities. IRS Policy Statement 5-133, Delinquent Returns—Enforcement of Filing Requirements, provides a general rule that taxpayers must file six years of back tax returns to be in good standing with the IRS. The policy also states that IRS management would have to approve any deviation from that rule.

Sometimes, IRS managers will require tax returns from even further back than six years, depending on:

• The degree of flagrancy.
• A prior history of noncompliance.
• The impact on future voluntary compliance.
• The existence of income from illegal sources.
• Whether there is minimal or no tax due.
• The IRS’s costs to secure the return versus anticipated tax revenue.

Streamlined filing compliance procedures

Streamlined filing compliance procedures allow U.S. taxpayers who failed to file required income tax returns and with unreported foreign accounts to become compliant without risk of penalty or fine.

The compliance procedures are designed only for individual taxpayers, which includes the taxpayer’s estate. The criteria are:

• Taxpayers must certify that their conduct was not willful. The procedures require taxpayers to certify that the failure to report all income, pay all taxes, and submit all required returns, including the FBAR, was due to nonwillful conduct.
• The IRS has not initiated a civil examination of the taxpayers’ returns for any tax year, and the taxpayers are not under IRS criminal investigation.
• Taxpayers eligible to use streamlined procedures who have previously filed delinquent or amended returns (so-called quiet disclosures) must pay any penalties assessed on those filings.

• Taxpayers who want to participate in the streamlined procedures need a valid taxpayer identification number (TIN). For U.S. citizens, resident aliens, and certain other individuals, the proper TIN is a valid Social Security number. Others need an individual taxpayer identification number, which, for taxpayers who do not have one, can be applied for when submitting the request to participate in the streamlined program.

The penalties for noncompliance are so harsh that it’s more prudent to be in compliance. Weinstein & Co. is prepared to guide clients through this process and to help them understand that complying with federal income tax requirements and their filing obligations for FBAR.