Taxpayers fall out of tax filing compliance for a variety of reasons. Perhaps they are going through a difficult period of life and lack the time, energy or resources to file their tax returns. Other taxpayers do not file tax returns because they cannot afford to pay their taxes. To avoid civil and criminal penalties it is best for taxpayers to timely file their tax returns even if they cannot make a timely full payment. The IRS and state may prepare Substitute For Returns based upon information received from taxpayer’s employer and banks. In this situation, the IRS and state will impose civil penalties and interest. Willful failure to file a tax return could lead to a criminal prosecution as a misdemeanor with a one-year sentence in prison per tax year. Tax evasion is a felony punishable for up to five years in prison per tax year.
Taxpayers with unfiled returns, unreported income or overstated deductions are in a sensitive or “eggshell” situation because they may be considered badges of fraud which could lead to a civil investigation or a criminal prosecution. In these cases, it is important to have legal representation. Attorney-client privilege prevents the government from compelling either the attorney or the client from disclosing confidential communications related to legal advice. Accountant-client privilege does not apply to criminal cases or to tax return preparers. Thus, an accountant could be forced to testify about everything said by the taxpayer.