It’s Tax Day: What happens if you do not file a tax return or pay your taxes

Tax day is here! What can you expect if you do not file your taxes or pay your taxes on time?

The first step is to prepare your tax returns. The returns must be prepared and postmarked or e-filed by midnight or they are deemed late. If you do not file your tax returns you can be penalized by the IRS. There are non-filing and late-filing penalties that are assessed by the IRS based on the amount of tax you owe.

The “failure to file” penalty is usually 5% of the tax owed for each month up to a maximum of 25%. If your return is over 60 days late, there's also a minimum penalty for late filing which is the lesser of $485 (for tax returns required to be filed in 2024) or 100 percent of the tax owed.

So many tax payers I have worked with in the past have not filed a return because they knew they would not be able to pay the taxes that they owed. My advice is to file the return anyway. There are a few good reasons for doing this, but the first is that you will avoid the failure to file penalty and save yourself that penalty. The next reason is that your return is likely better for you than what the IRS would believe you owe if they prepare a Substitute for Return (SFR).

If you are not able to pay your tax return on time, you will be assessed a “failure to pay” penalty. The failure to pay penalty is one-half of one percent for each month, up to a maximum of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. The rate increases to one percent if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy property. In addition to the penalty, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily. That means that every day, your interest accrual increases because it adds the previous day’s interest to the balance owed.

But, what if you file an extension for your tax return? If you file an extension today, you can delay the filing of your income tax return for six months from the due date. This extension is automatically granted, but the extension is only an extension to file - not an extension to pay your taxes. So, your tax is still due today and if you fail to pay the tax owed today (even if you file on time after the extension) you will owe penalties and interest for the failure to pay on time.

Foster Parents as Advocates: Fighting for What's Best for the Child

It is the goal and policy of the South Carolina Department of Social Services to attempt to reunite a child with his or her birth family after being separated due to abuse or neglect. You may be a foster parent who has placement of a child that you don’t believe would be served by being reunited with their birth family.

A few years ago, I represented foster parents through a horrific situation with DSS. On a warm fall evening they two sisters into their home. One child about a year old. The other only a few weeks old. When the children came into their care they were filthy. The oldest child could not yet walk, though she stood bow-legged because she spent almost all of her waking hours in a child’s bouncy seat. For two years they cared for these children as DSS gave the birth parents chance after chance to get things right. DSS blamed the foster parents for the delay because of their desire to maintain custody and to adopt the children. While I believe in the process to reunite families, this case was clear that the birth parents were never going to get their act together. They had few parenting skills or instincts, lacked life skills despite completed parenting classes, and could not stay off of drugs.

DSS ignored our warnings and calls to reconsider and the parents went from supervised visits, to unsupervised daytime visits, to weekend visits and ultimately sought a return of the children. DSS continued to push towards reunification though the signs were there that the birth parents had not improved their situation and were not ready for custody of the children to return. We tried a two day contested permanency planning hearing where the family court determined the parents had sufficiently remedied the conditions that initially led to the removal of the children by DSS. That day, my clients’ hearts broke as they returned those two little girls back to their birth parents. At that time, the children had spent about 80% and 90% of their lives with my clients. They were the only parents they knew. And just like that they were gone. Traumatized again and returned to their birth parents - who were all but strangers. But, the Court made sure there was a long review period where DSS had to keep up with the family before closing the case.

The story does not end there. Prior to the return in the DSS we had also filed a private termination of parental rights and adoption action seeking privately what DSS would not. In this case we had another Guardian ad Litem who was also investigating. We continued to observe and keep tabs on the children. Until another report was made to DSS. This time with medical concerns for the children. This time the Court found it appropriate to return the children to my clients in the private action. Now, they were the legal custodians.

More investigation ensued and another two day trial followed. We learned that shortly after the children were placed by with the parents, there were failed drug screens. The house was filthy again, and the children were not well taken care of. Ultimately, these foster parent clients were able to adopt these two children. After three years of fighting, litigating, investigating, appeals, and untold expense, this family was created.

What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty can be assessed against responsible parties of a business who choose not to timely submit the “trust fund” portion of their employee’s payroll. The Trust Fund portions of the payroll taxes are from withholdings that are the employee’s portion of the payroll tax, the Social Security/Medicare tax. These are called “trust fund” taxes because they are not the business taxes, but are contributions being withheld from the employee and held in trust until the business submits the taxes to the IRS.

Who is a “responsible party” for a trust fund penalty?

The TFRP may be assessed against any person who is responsible for collecting or paying withheld income and employment taxes and Willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

• An officer or an employee of a corporation,

• A member or employee of a partnership,

• A corporate director or shareholder,

• A member of a board of trustees of a nonprofit organization,

• Another person with authority and control over funds to direct their disbursement,

• Another corporation or third party payer,

• Payroll Service Providers (PSP) or responsible parties within a PSP

• Professional Employer Organizations (PEO) or responsible parties within a PEO, or

• Responsible parties within the common law employer (client of PSP/PEO).

For willfulness to exist, the responsible person must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. There is no motive or intent requirement. The person does not have to have a bad intent to be assessed the trust fund recovery penalty.

Tax Settlement: Offer in Compromise

You have no doubt heard a radio or television advertisement claiming to be able to settle your tax debt for “pennies on the dollar”. I understand that is an enticing thing to hear if you owe back taxes to the IRS and they have started the process to actively try to collect the taxes from you.

The Offer in Compromise program is the IRS program that allows them to accept less than is owed to resolve a tax liability for an individual or a business, but not everyone qualifies.

There are several offer in compromise options: doubt as to collectability, doubt as to liability, and an offer in compromise for effective tax administration. These different types of offers are for different circumstances, but the overwhelming number of offers in compromise are for “doubt as to collectability” which means the IRS will likely not be able to collect the full amount of tax that you owe due to your income, your assets, and the amount of time the IRS has remaining to attempt to collect your taxes.

Before anyone can tell you if you will qualify for an offer in compromise - or begin to evaluate if they can settle your taxes for you - they would have to evaluate your full financial circumstances. The offer in compromise for doubt as to collectability considers your monthly disposable income and the equity you have in your assets in the equation to determine how much you should offer.

A “doubt as to liability” offer in compromise is exactly what it sounds like - it is submitted when there is a genuine dispute as to the existence of or amount of the tax alleged that you owe under the law. The amount offered in this situation is not about what you can pay, but what you assert is the correct tax that you would owe.

The final type of offer in compromise is based on Effective Tax Administration. In this scenario, the taxpayer is not disputing the amount or type of tax that is owed, has sufficient funds to full pay the tax liability, but due to some exceptional circumstance or public policy consideration, paying the tax owed would created an undue economic hardship or would be unfair or inequitable.

Can I Sue DSS for foster care abuse?

I have represented hundreds of clients with DSS abuse and neglect allegations. Clients almost never have a positive experience with the Department of Social Services. That is understandable. A government agency has come into their home and either threatened to remove or has removed their children. And, this is a traumatic experience for the children, parents, and other family members to have the family separated in this way. Sometimes, there are valid reasons for DSS involvement in a family. And DSS has a difficult job of working to preserve family bonds, provide necessary services to these families, and protect the children in their care, sometimes they just don’t do a good job.

Many clients ask me if they can sue DSS for the interference in their lives. Typically, a governmental agency is immune from most actions. That means they cannot be sued in most cases. So, the removal of your children is not necessarily a reason DSS can be sued. The South Carolina Tort Claims Act, S.C. Code § 15-78-60(25), permits lawsuits for gross negligence committed by a state agency.

The most common way for people to recover from DSS is for injuries or abuse to children while they are in foster care. Children can be injured in foster care in a number of ways: they may be assaulted physically or sexually, raped by adults or other children in the home, having food withheld, having to live in unsafe and unsanitary living conditions, neglect of appropriate medical treatment, care, or medications, neglect of emotional or mental healthcare, not being seen regularly by their caseworkers who have excessive caseloads, cruel or unusual punishment or discipline by foster parents, or even death.

Abuse in foster care can be physical, mental, social, or emotional. A child may suffer physical injuries like broken bones, brain trauma, cuts, bruising, and internal organ damage. They may have mental injuries, including anxiety, a decline in school performance, avoidance of social situations, and other harm.

What is Gross Negligence?

"Gross negligence is the intentional conscious failure to do something which it is incumbent upon one to do or the doing of a thing intentionally that one ought not to do." Etheredge v. Richland Sch. Dist. One, 341 S.C. 307, 310, 534 S.E.2d 275, 277 (2000) (citing Clyburn v. Sumter Cnty. Dist. Seventeen, 317 S.C. 50, 451 S.E.2d 885 (1994); Richardson v. Hambright, 296 S.C. 504, 374 5.E.2d 296 (1988)). In other words, "[i]t is the failure to exercise slight care." Id. at 310, 534 S.E.2d at 277 (citation omitted). "Gross negligence has also been defined as a relative term, and means the absence of care that is necessary under the circumstances." Id. (citing Hollins v. Richiand Cnty. Sch. Dist. One, 310 s.c. 486, 427 S.E.2d 654 (1993)). Normally, the question of what activity constitutes gross negligence is a mixed question of law and fact. Id. However, "when the evidence supports but one reasonable inference, the question becomes a matter of law for the court." Id. (citation omitted). Bass v. S.C. Department of Social Services, 414 S.C. 558, 2015).

Can I resolve my tax debt if I have past due tax returns?

The short answer is generally, “no”. The IRS requires compliance before you can resolve your tax problems. So what is “compliance”? It isn’t unusual for people who owe back taxes to have several years of unfiled tax returns. When we begin the process of resolving your tax problems, the first step we take is to examine your tax history to determine if you have any delinquent or unfiled tax returns. A review your tax transcript will show us if you filed a return, when it was filed, when the tax was assessed, how much is owed, and other important information. The transcript will also detail for us if the IRS filed a substitute for return (SFR) for you since you did not file a tax return. An SFR is a tax return filed on your behalf by the IRS so they can assess and begin collecting the tax owed from you. Many times, simply filing a tax return can reduce your tax debt as it will replace what is owed by the SFR.

Now that we have reviewed your tax account transcript and determined which tax years you have not filed, how far do you have to go back to be “in compliance”. The IRS requires you to have filed the six most recent years of tax returns to be in compliance. If you have deliquent tax returns that will be our next step in the tax resolution journey.

To help prepare these returns you will need information about your wages/income for each year. Your tax attorney can assit you in obtaining a Wage and Income Transcript from the IRS if you do not have access to these records. These records will provide detail of all income reported to the IRS on your behalf for each tax year.

What is the first step in resolving my tax debt?

When you work with a tax resolution professional or tax attorney the first step towards getting your tax problems solved is to find out where things stand. Once retained, our first step will be to get you to execute a Power of Attorney (IRS Form 2848) which gives us the authority to communicate with the IRS on your behalf. In fact, once that power of attorney is filed with the IRS, they cannot call you directly - they begin speaking with your lawyer.

Once that power of attorney is on file, it allows your tax attorney to request account transcripts for the years you believe you owe. In most situations, we can obtain tax transcripts for the past ten years. Tax transcripts will show information related to your filing status, when your returns were filed (or if a return was filed), what taxes, penalties, and interest are owed for each period, and other information. The transcript will also provide information that helps us to determine what collection statute of limitations (CSOL) is remaining on each tax period you owe. That means, we can help identify how much longer the IRS has to collect the tax debt that you owe.

Once we have gathered your tax transcripts for the periods you owe, we can begin to evaluate your current financial circumstances and strategize for the best way(s) to resolve your tax problems.

What are my options if I owe back taxes to the IRS?

Owing back taxes to the IRS can be stressful. Receiving notices from the IRS in the mail about your past due taxes is scary and most people don’t know where to start to try to resolve the debt. Instead, they may throw the notice in a drawer and pray the IRS goes away. The bad news is that - no matter what kind of administration is in the Whitehouse, the IRS is not going away. The good news is there are several options available to help you address the situation. Here are some common options:

1. Payment Plans (Installment Agreements): You can arrange to pay off your tax debt over time through a monthly payment plan. The IRS offers various types of installment agreements, including streamlined installment agreements for debts under a certain threshold and partial payment installment agreements for those unable to pay the full amount owed.

2. Offer in Compromise (OIC): This program allows taxpayers to settle their tax debt for less than the full amount owed if they meet certain criteria demonstrating financial hardship (it is unlikely the IRS will be able to fully collect the tax debt over the time they are legally allowed to attempt to collect) or doubt as to liability. The IRS will consider your ability to pay, income, expenses, and asset equity when evaluating your offer. Some offers are “lump sum” offers and others are paid over time. Beware of companies that promise to be able to settle your tax debt for “pennies on the dollar”. While it is possible, it is not the norm. Things that appear too good to be true usually are.

3. Currently Not Collectible (CNC) Status: If you're facing financial hardship and cannot afford to pay your tax debt, you may qualify for CNC status. This temporarily suspends IRS collection activities until your financial situation improves. However, interest and penalties may continue to accrue during this time.

4. Penalty Abatement: In certain circumstances, the IRS may waive penalties associated with unpaid taxes. This typically requires demonstrating “reasonable cause”. Reasonable cause means you can demonstrate an acceptable reason to the IRS that your penalties should be reduced or eliminated such as significant medical issues, natural disasters, or reliance on erroneous advice from a tax professional.

5. Bankruptcy: In some cases, tax debts may be dischargeable through bankruptcy, but this depends on various factors, including the type of tax debt and the timing of the bankruptcy filing.

6. Innocent Spouse Relief: If you filed a joint tax return with your spouse and your tax debt is a result of your spouse's actions, you may qualify for innocent spouse relief, which could relieve you of responsibility for the tax debt.