Unfiled Taxes in California

Hard working people in California may mistakenly consider their taxes as a place where they can catch-up on debts by failing to file taxes, under-paying their taxes, or failing to make other disclosures that would create additional tax liability. Unfortunately these types of tax schemes are likely to offer only short-term relief followed by more severe financial problems. This is because the Internal Revenue Service (IRS) has significantly stepped up the processes and procedures it utilizes to detect non-compliant taxpayers. The agency has developed computer systems that cross reference an array of financial records to detect discrepancies in the information you provide on your tax returns and other disclosures. If the IRS does detect a problem, the agency will aggressively pursue it and seek interest and other penalties.

If you suspect that you may have a tax compliance problem, time is often of the essence. A non-compliant taxpayer has the most leverage when his or her tax disclosure is voluntary. If you wait until you are already under investigation, certain options will have already been foreclosed. Working with an experienced tax professional as soon as possible, such those at the Brager Tax Law Group, can increase the likelihood of a more favorable outcome.

If the intent to evade taxes appears to be present and the acts that resulted in the unfiled taxes or other deficiency goes beyond mere carelessness, civil or criminal tax fraud may be charged. Actions that the IRS may interpret as badges of fraud can include:

• Inadequate tax or financial records
• Failure to file tax returns
• Failure to make estimated tax payments
• Excessive dealings in cash
• Other illegal activities
• Providing implausible or inconsistent reasons for your actions
• Understatements of income
• Attempting to conceal other illegal acts

If you believe that you may have engaged in any of the foregoing behaviors, engaging an experienced tax professional can help protect you from the potential worst case scenario.

Under 26 USC §6663 a “civil fraud penalty” can be imposed. The civil fraud penalty is equal to 75% of the portions of underpayment that can be attributed to the fraud. There is technically no limitation on how long the IRS is permitted to bring civil fraud charges, however normally goes back only six years.

The definition of criminal tax fraud and the penalties that can be imposed should a taxpayer be found guilty of criminal tax fraud are set forth in 26 USC §7201. The criminal tax fraud statute states that any individual who “…willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.” Since your freedom is at stake, working with an experienced tax attorney is essential.

California businesses that have failed to file taxes or those that have been randomly selected to undergo an IRS audit may have the audit uncover problems with their federal payroll taxes. If an audit reveals payroll tax problems at the federal level, problems at the state level with the California Employment Development division (EDD) are likely to follow. Because the IRS and EDD handles issues relating to payroll taxes differently, you will need a representative that understands the standards used to by each agency. For instance, while the IRS typically relies on a 20 factor test to determine 1099 independent contractor status, EDD’s inquiry is more focused on whether the principle controls the mode, manner and method of the work performed. Our experienced tax professionals understand both the state and federal systems and will work to correct your tax compliance problems.

There isn’t one path to correct problems created by unfiled or unpaid taxes. Rather, the solutions that are most likely to correct past problems while minimizing the consequences of disclosures can only be determined after a thorough, fact-intensive review of your tax and financial records. Depending on your case a noisy disclosure, a quiet disclosure or participation in another voluntary disclosure program may be appropriate.

To see what options are likely to be viable in correcting your unfiled or unpaid tax problems, contact the Brager Tax Law Group today. To schedule a tax consultation, contact us online or call us at (800) TAX LITIGATOR.