Back Taxes, Consequences & Resolution Options
Delinquent taxpayers face significant federal tax liabilities for unfiled returns spanning multiple years. Civil penalties of 5% of the unpaid tax for each month or fraction thereof that the return is tardy, up to a maximum of 25%, plus interest and penalties. Moreover, the statute of limitations does not begin to run until a tax return has been filed and accepted by the Internal Revenue Service for filing. A return must be filed for statute of limitation protection. See 26 United States Code Annotated § 6651; the Internal Revenue Code. Moreover, delinquent taxpayers could face misdemeanor tax charges under 26 U.S.C.A. § 7203 and even felonious tax charges under 26 U.S.C.A. § 7201 with a six-year statute of limitations.
And that is not all. Texas imposes its own civil penalties, a four-year civil assessment limitation, and graduated criminal penalties for businesses owing back taxes. Note that although Texas Constitution, Article 8 forbids taxation of Texan’s personal income; it permits taxation of corporations and other business entities structured under the Texas Business Code. Texas obtains over 50% of the State’s revenue from Sales and Use Taxes. The Texas Tax Code contains several civil and criminal tax provisions that could be applicable in evasive business tax non-filer cases.
U.S. citizens born in the United States cannot be removed from the United States for delinquent tax debts. As a general rule, Naturalized citizens are safe from deportation for delinquent tax debts. But this is not an absolute because fraudulent representations during acquisition of an immigration benefit could be rolled back when a migrant lacks good moral character. Naturalization can be revoked for migrants who fail to establish good moral character. Delinquent tax debts have been determined by SCOTUS and the 5th Circuit Court of Appeals; that sits over Texas, could constitute fraud; fraud committed in tax matters can form the basis for the legal argument that a migrant lacks good moral character. Thus, a migrant could be ineligible to receive any immigration benefit. This finding of lack of good moral character could be the basis for revoking naturalization in some instances. Finally, lawful permanent residents, visa holders, undocumented migrants and other migrants face a significant risk of deportation upon conviction of tax fraud, tax evasion and making false statements on tax returns. Removal from the United States is a federal function, but Texas officials could assist the federal government in deporting migrants criminally convicted of federal, state and local back taxes that are seriously delinquent. Texas has traditionally treated sales, use and property tax delinquencies as civil matters and pursued civil penalties rather than criminal prosecutions.
What Turns Civil Non-Filing into Criminal Prosecution in Federal and State Tax Matters
In both federal and State tax matters, the distinction between a civil penalty situation and a criminal prosecution hinges principally on willfulness and the presence of affirmative acts of evasion. Consultation with a seasoned tax attorney at Coleman Jackson, P.C. could give you a clearer understanding of the context of the facts and circumstances that swivel that criminal prosecution hinge. State Courts in Texas and the Texas Comptroller of Public Accounts (in State and Local Tax Matters); like the Federal Courts and the IRS (in international and federal tax matters) examine several factors in deciding whether to refer a case criminally to respective prosecutors:
- Significant and repeated understatement or non-reporting of income, sales, taxable transactions
- Repeated failure to file returns across many years or tax periods
- Concealment of assets, use of nominee accounts, structured cash transactions, or offshore accounts
- False withholding claims (e.g., fraudulent W-4 forms)
- Failure to cooperate with IRS investigators in federal tax matters; or failure to cooperate with the Texas Comptroller of Public Accounts in SALT tax matters
- Failure to keep adequate books and records (this is applicable for international, federal tax matters and SALT tax matters at the State and Local level.
- Taxpayer’s awareness of filing obligations (prior filing history, professional status, or prior IRS contact or contact with the Texas Comptroller of Public Accounts field offices)
- Large tax amounts at stake—IRS Criminal Investigation (CI) consistently prioritizes high-income non-filers. Federal tax penalties are akin to running on a treadmill; penalty upon penalty. The Texas Comptroller priority large dollar delinquencies and repeat abusers of the Texas Tax Code. Messing with Texas by gaming the system and not submitting taxes on taxable sales is serious and very likely to be caught. Texas has a very robust audit program where auditors regularly audit businesses throughout the State and are likely to discover underreported sales during the audit examination. The Tax Code permits the State to use estimating techniques when the business records are non-existent or unreliable. Federal and State taxing authorities are particularly interested in prosecuting egregious tax evaders including high-income tax evaders. It is worth noting that although the federal system has a 10-year collection statute of limitations; Texas does not have a statute of limitations as far as delinquent taxes are concerned. Delinquent taxes in Texas attaches to all taxpayers’ property and remains there until paid in full. Moreover, If the taxpayer’s business collected Texas sales tax and failed to remit it, Texas Tax Code § 151.7032 creates a seven-tier criminal offense structure Texas Tax Code § 151.7032 moving on a continuum from second class misdemeanor to serious felonies with substantial State jail time.
Resolution Options Regarding International and Federal Tax Delinquencies
Context matters in back tax cases; so, all the facts and circumstances of the delinquent taxpayer’s situation matter in coming to the right or best solution. This is done on a case-by-case manner. Taxpayers with international or federal tax problems should consult a skilled tax attorney immediately. The following are some of the options that could be discussed:
IRS Voluntary Disclosure Program (VDP): The most important option for taxpayers with potential criminal exposure. Under the VDP, a taxpayer who voluntarily comes forward before an IRS investigation begins, makes a complete and truthful disclosure, and cooperates fully—including arranging full payment—can typically avoid criminal prosecution. The key eligibility requirements are: (1) the disclosure must be timely—before the IRS has initiated any investigation of the taxpayer; (2) the disclosure must be truthful and complete; (3) the taxpayer must cooperate; and (4) the taxpayer must pay (or make arrangements to pay) all taxes, interest, and applicable penalties. The VDP does not guarantee no criminal prosecution, but the IRS has consistently honored compliant VDP submissions with civil-only resolutions.
Delinquent Return Filing: For non-willful non-filers without significant criminal exposure, simply filing all delinquent returns is often the best first step. The IRS frequently abates the failure-to-file penalty under 26 U.S.C. § 6651(a) for reasonable cause, which may include serious illness, reliance on bad advice, or other circumstances. This is separate from and less protective than the VDP. If delinquent FBARs (FinCEN Form 114) are involved; it’s best to consult an experienced tax attorney to explore your legal options.
Installment Agreement: Under 26 U.S.C. § 6159, the IRS is required to enter into installment agreements when the aggregate liability is $10,000 or less and certain conditions are met; for larger amounts, installment agreements are discretionary; 26 USCA § 6159. No levy may be made while an installment agreement offer is pending or in effect; 26 USCA § 6331.
Offer in Compromise (OIC): Under 26 U.S.C. § 7122, the IRS may compromise a tax liability based on (1) doubt as to liability, (2) doubt as to collectability, or (3) promotion of effective tax administration; see 26 USCA § 7122. An accepted OIC protects against levy; see 26 USCA § 6331. An OIC based on doubt as to collectability requires disclosure of all assets and income and demonstrating that the taxpayer cannot pay the full amount. In recent years, OIC have been difficult to obtain as a practical matter. OIC are reserved for destitute taxpayers who are; for the most part, seeking a fresh start. Typically, a taxpayer with property; especially, residential property will not qualify for an OIC.
Currently Not Collectible (CNC) Status: This is a very promising option where the tax account is not reasonably collectable. In such circumstances; after looking at the taxpayer’s financial condition, the IRS may place accounts in CNC status when the taxpayer lack ability to pay. Interest continues to accrue but active collection is suspended.
Passport Revocation: Under 26 U.S.C. § 7345, a taxpayer with an assessed, legally enforceable federal tax liability exceeding $50,000 (adjusted for inflation) may have their U.S. passport denied, revoked, or limited if either (1) a notice of lien has been filed and administrative rights have been exhausted or lapsed, or (2) a levy has been made 26 USCA § 7345. The statute does not apply to debts being paid under an installment agreement or offer-in-compromise, or where collection is suspended due to pending due process hearings or innocent spouse relief requests. This applies to all citizens and LPRs. The passport consequence is lifted if an installment agreement or OIC is accepted, or if the debt is paid. But in these situations, legal representation could be advised.
Resolution Options Regarding SALT Tax Delinquencies
The Texas Comptroller offers several resolution options to delinquent SALT taxpayers:
Voluntary Disclosure Agreement (VDA): The Texas Comptroller operates an administrative Voluntary Disclosure Agreement program. Taxpayers who have not been contacted by the Comptroller may proactively disclose unreported taxes, typically with a look-back period of four years (often mirroring the civil assessment limitation), waiver of some penalties, and a structured payment plan. This is administered through the Comptroller’s office and is not available to taxpayers with back taxes, if the Comptroller is already auditing the taxpayer or otherwise have made prior contract with the delinquent taxpayer. But the taxpayer may still want to discuss the matter with a skilled SALT tax lawyer; initial contact with the Texas Comptroller’s Office concerning VDA is best handled with care by legal counsel rather than directly by the taxpayer.
Penalty Waiver: Under Texas Tax Code § 111.103, the Comptroller may settle a claim for tax penalty or interest if “the taxpayer exercised reasonable diligence to comply with the provisions of this title”; read Texas Tax Code § 111.103.
Franchise Tax Reinstatement: A corporation or LLC whose privileges were forfeited for non-filing may be reinstated by filing all delinquent reports and paying all taxes, penalties, and fees, subject to secretary of state procedures. Note that it’s unlawful to operate in Texas in inactive status at the Texas Secretary of State’s Office. Inactive entities cannot sue for grievances in the State of Texas. SOS can inactivate or revoke a business from operating in Texas until tax delinquencies are paid or settled.
Payment Plans: The Comptroller enters into payment plans for delinquent taxes on a case-by-case basis. The Comptroller’s payment plans are typically extremely short; probably five years at the most. It’s an all facts and circumstances situation.
Key Take Aways
Delinquent taxpayers are in a serious situation. It’s a situation that should not be ignored. International, Federal and State and Local Tax penalties can range from civil penalties (that stacks up fast) to criminal prosecution when the delinquency is due to fraud, intentional violations of the system or attempts to evade responsibilities under the applicable tax system.
But there are viable legal resolution options at the federal, state and local levels of government. Delinquent taxpayers should quickly file back tax returns after consultation with a skillful tax legal team by their side.
This law article is written by attorneys at Coleman Jackson, P.C., which is located at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206, for educational purposes; it does not create an attorney-client relationship between this tax law, business law, and estate law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family, or your business.
Coleman Jackson, P.C. | Tax Law, Business Law, Estate Law | English: (214) 599-0431 | Spanish: (214) 599-0432.
