Remember Al Capone?

Author: Keith Huggett 

Al Capone was found guilty of tax evasion - not paying taxes on his ill gotten wealth, estimated to be worth somewhere around $100 million back in 1927. That would be worth $1.2 billion in today's monetary value. For not paying his taxes, he received a sentence of ten years in federal prison and an additional year to be served in Chicago. He only served seven years and died in 1946. His conviction resulted in criminals and citizens alike paying their back taxes. In 1931, the year Capone was convicted, more than $1 million unpaid taxes were paid to the IRS.

Things have changed a lot since 1931. Now the IRS assesses penalties to your unpaid taxes along with accruing interest.  The longer you go without filing your taxes, the bigger the penalties and interest payment becomes.  

Initial penalties are assessed in one of two ways: Failure to file or failure to pay. Failure to file is assessed by the IRS at a rate of 5% per month or partial month up to a maximum of 25%. Failure to pay is assessed at a rate of 0.5% per month or partial month up to a maximum of 25%. If both penalties are assessed, the failure to file is reduced by the failure to pay.

Penalties get more complex if it is determined that fraud is involved. Criminal fraud, being illegal, will inflict heave fines, imprisonment, or both on the taxpayer.  There is also the possibility of civil fraud, which is also illegal, but not to the same extent as criminal fraud. It's penalties are only 75% of the portion of the tax underpaid attributed to the fraud. Still not worth the risk!

There are also penaltied that are applied for being negligent. THe penalty for not being careful or disregarding the tax rules is 20% of the portion of the underpayments attributable to the negligence. Seems a lot just for missing a few rules.

Filing a frivolous return can also get you into trouble. While you are filing your tax return, you are deliberately leaving out information necessary for filing the return, such as your social security number. The cost of filing frivolous returns is $500 per return. Why waste time sending in false returns?

So what we've learned here is that it is in your best interest to file your tax returns in a timely manner. If tax day is approaching too quickly fo your liking, you always have the option to file an extension. If preparing your taxes is out of your comfort zone, there are many options available to you, among them, seeking professional tax assistance.

If you are already behind the tax 8-ball, there are tax professionals who specialize in back taxes, lien removal, payment plans, and offers in compromise. The IRS may seem like the enemy but they will work with you to correct your situation. With an indication that you are ready to take some action all it requires is a phone call.