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How does the IRS respond to years of unfiled tax returns?

| May 3, 2021 | Criminal/Civil Tax Litigation |

When taxpayers fail to file tax returns for multiple years, the IRS has a variety of collection options. It’s important to remember that the IRS has sources that can tell the agency how much you made in wages and some other types of income.

Here is an example of the IRS attempting to collect from on resident of Dallas, Texas, who had failed to file tax returns starting in 1996:

Starting in at least 2004, the IRS started the process of garnishing the man’s wages. It filed Notices to Levy on Wages. When it was aware of particular employment, it attempted to withhold the taxes from the man’s salary or to levy or garnish those wages.

The taxpayer responded by filing for bankruptcy four times. In some of those filings, he submitted false returns and related documents. For example, according to Accounting Today, he filed income tax returns with his 2009 bankruptcy that indicated he owed nothing in taxes.

In 2011 and 2013, the taxpayer filed three false 1040NRs, representing that he was not a resident of the United States but instead lived in the “foreign country” of Texas. He also claimed that he was entitled to tax refunds.

The shenanigans continued. Between 2012 and 2015, the man filed inflated W-4s, claiming excessive exemptions to prevent tax from being withheld by his employers. He claimed, falsely, that he was “exempt” from having his taxes withheld from his wages.

In 2014, the taxpayer testified in a bankruptcy case. Apparently, he repeated his claims that he was exempt from withholdings or that he lived in a foreign country. The bankruptcy judge wasn’t having it.

The judge claimed that the taxpayer’s arguments were “all a big ruse to keep people from paying taxes” and characterized the man’s behavior as a “tax evasion system.” He warned the man that continuing to refuse to pay income taxes would not be viewed favorably in the courts.

But in 2015 and 2016, the taxpayer persisted in his efforts to evade taxation, filing two additional petitions for bankruptcy. It’s worth noting that federal tax obligations are generally not discharged by bankruptcy.

Overall, between 2009 and 2017, the taxpayer earned $836,699 in wages but paid nothing in taxes. By January 2019, he owed $326,257 to the IRS.

His efforts finally caught up to him. He pled guilty to attempting to obstruct the due administration of U.S. internal revenue laws. He is facing up to three years in prison and will be sentenced on Aug. 13.

The IRS has plenty of tools at its disposal to deal with tax cheats. This taxpayer may have gotten off easily.