Q: What should I do if I have unfiled individual or business tax returns?
A: Depending upon the amount of unreported income and the years of unfiled returns, the taxpayer could be at risk per tax year for willful failure to file a tax return, that is punishable up to one year in prison; or tax evasion, which can carry a five-year prison term. The attorney-client privilege prevents the government from compelling the attorney from sharing confidential communications related to the legal representation. This privilege is very important for taxpayers at risk for criminal prosecution. Typically, the IRS will send a letter to the taxpayer if the tax return was not filed. Even if the IRS has not yet contacted the taxpayer about unfiled tax returns, the problem will not go away. The preparation of old tax returns is a time-consuming process as the records may no longer be easily accessible. Late-filed returns are closely scrutinized by the IRS.
The risk of criminal prosecution significantly increases if a former spouse or employee plans to, or has already, contacted the IRS with allegations of tax fraud. In this situation, a domestic voluntary disclosure could be the best way to file the old tax returns without a criminal investigation. There are several requirements to be eligible for a taxpayer to make a domestic voluntary disclosure. The taxpayer notifies the IRS of the unfiled tax returns. The taxpayer cannot already be under an IRS audit examination or criminal investigation. The unreported income must be from legal sources. The taxpayer must cooperate with the IRS to determine the correct tax liability. Lastly, the taxpayer must make a good faith effort to fully pay the tax, interest, and penalties.