Failure to File, Supply Information, or Pay Tax

A. Failure to File, Supply Information, or Pay Tax Statute – IRC 7203

Any person required under this title to pay any estimated tax or tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall, in addition to other penalties provided by law, be guilty of a misdemeanor and, upon conviction thereof, shall be fined not more than $25,000 ($100,000 in the case of a corporation), or imprisoned not more than 1 year, or both, together with the costs of prosecution. In the case of any person with respect to whom there is a failure to pay any estimated tax, this section shall not apply to such person with respect to such failure if there is no addition to tax under section 6654 or 6655 with respect to such failure. In the case of a willful violation of any provision of section 6050I, the first sentence of this section shall be applied by substituting “felony” for “misdemeanor” and “5 years” for “1 year”. IRC 7203.

B. Interpretation of IRC 7203

IRC 7203 creates four different crimes:

  1. Failure to pay an estimated tax or tax;
  2. Failure to file a return;
  3. Failure to keep records; and
  4. Failure to supply information.

I’ll address each of these in the following subsections.

1. Failure to Pay a Tax or Estimated Tax

There is a common misconception that it is not illegal to not pay your tax. Not true. Willfully failing to pay your tax is a misdemeanor that could lead to a year in prison for each year that you willfully failed to pay tax.

a. Elements of the Crime

The elements of failure to pay a tax or estimated tax are:

  1. The person is required by law to pay a tax;
  2. Failure to pay the tax when required; and
  3. Willfulness.

The difference between failure to pay and evasion is the concealment of assets or use of nominees.

The statute of limitations for this crime is 6 years.

b. Willfulness

Willfulness is similar to other tax offenses. However, one key showing that the prosecution must make as part of a showing of willfulness is that the taxpayer had the ability to pay the tax; if you can’t pay, then you did not willfully not pay.

2. Failure to File a Return

a. Elements of the Crime

The elements of the crime of failure to file a return are:

  1. The person is required by law to file a return for the taxable period;
  2. The person failed to file the return as required by law; and
  3. The failure to file was willful.

Failure to file almost any form is a misdemeanor. However, failure to file Form 8300 which reports receipt of cash payments in excess of $10,000 is a felony with a maximum punishment of 5 years and/or $25,000 fine.

The statute of limitations for this crime is 6 years.

b. Willfulness and Defenses

Willfulness for failure to file a return is generally the same as for other tax crimes, and is a voluntary, intentional violation of a known duty. However, there are many specific exceptions to and examples of willfulness for failing to file a return.

Examples of willfulness and failed defense in the context of failure to file include:

  • Filing a Form 1040 without sufficient information to allow the computation of tax.
  • Return with a bunch of blanks and zeroes.
  • Failure to file in successive years.
  • Filing in prior years.
  • Delinquent filing of returns, particularly where taxpayer knew his failure to file was about to be discovered.
  • Chronic depression and neurological defense are no defense when taxpayer can handle other aspects of life.
  • Preoccupation with personal and business matters is no defense.
  • Lack of funds is no defense.
  • Procrastination is no defense.
  • The Fifth Amendment does not justify failure to file; can only be claimed in response to specific questions on a return.

Examples of lack of willfulness in the context of failure to file include:

3. Failure to Keep Records

The elements of the crime of failure to keep records are:

  1. The person lawfully required to maintain books and records;
  2. Willfully failed to maintain books and records.

The main question in litigation is what records are required to be maintained.

The statute of limitations for this crime is 3 years.

4. Failure to Supply Information

The elements of this offense are:

  1. Person required by law to supply information;
  2. Failure to supply the information when required; and
  3. Willfulness.

The statute of limitations for this crime is 3 years.

Examples of include:

  • Failure to file Form 1099.
  • Failure to file Form 1065.
  • Filing frivolous returns.

B. Conclusion

Although these penalties are usually misdemeanors, they can still carry a sentence of up to 1 year in federal prison. Also, if the taxpayer answers investigators’ questions too evasively, they could end up charged with evasion.  It is important to have representation at each step to protect yourself. If you are or suspect you are being investigated for these crime, give us a call at (408) 459-8427.