How to handle Non-Filers

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Laura - I assume this is an individual return. If they don't owe any taxes then they should get them filed and get their refund and that will be the end of it (unless they live in a State that might "possibly" throw a penalty against them, but I doubt it). If they owe then they do have penalties and interest accruing as time passes. They should file as soon as they can to hold penalties and interest to a minimum. There are more extreme situations which they can have penalties abated but an answer of "I just didn't get around to it" won't fly. This is about as much as I can say preliminarily.

--Gregg Gillaspy, CPA, CFP 22:18, 25 May 2005 (CDT)----

In most cases the IRS will waive the penalty if the return is not filed and the return has been overpaid. This is the case for reasonable reasons of not filing. If the IRS determines the return was not filed due to other then reasonable cause a penalty can be assessed. The penalty for not filing is based on the tax liability for the year without regards to payments made.

User: Bruce Wilkinson, CPA

Sec. 6651. Failure to file tax return or to pay tax

   (a) Addition to the tax
     In case of failure -
       (1) to file any return required under authority of subchapter A of chapter 61
       (on the date prescribed therefor (determined with regard to any extension of 
       time for filing), unless it is shown that such failure is due to reasonable 
       cause and not due to willful neglect, there shall be added to the amount 
       required to be shown as tax on such return 5 percent of the amount of such tax 
       if the failure is for not more than 1 month, with an additional 5 percent for 
       each additional month or fraction thereof during which such failure continues, 
       not exceeding 25 percent in the aggregate;

(2) to pay the amount shown on tax on any return specified in

       paragraph (1) on or before the date prescribed for payment of
       such tax (determined with regard to any extension of time for
       payment), unless it is shown that such failure is due to
       reasonable cause and not due to willful neglect, there shall be
       added to the amount shown as tax on such return 0.5 percent of
       the amount of such tax if the failure is for not more than 1
       month, with an additional 0.5 percent for each additional month
       or fraction thereof during which such failure continues, not
       exceeding 25 percent in the aggregate; or

(3) to pay any amount in respect of any tax required to be

       shown on a return specified in paragraph (1) which is not so
       shown (including an assessment made pursuant to section 6213(b))
       within 21 calendar days from the date of notice and demand
       therefor (10 business days if the amount for which such notice
       and demand is made equals or exceeds $100,000), unless it is
       shown that such failure is due to reasonable cause and not
       due to  willful neglect, there shall be added to the amount 
       of tax stated in such notice and demand 0.5 percent of the  
       amount of such taxif the failure is for not more than 1 month, 
       with an additional 0.5 percent for each additional month or fraction thereof 
       during which such failure continues, not exceeding 25 percent in the aggregate.
       In the case of a failure to file a return of tax imposed by chapter 1 within 
       60 days of the date prescribed for filing of such return (determined with 
       regard to any extensions of time for filing),  unless it is shown that such 
       failure is due to reasonable cause and not due to willful neglect, the addition 
       to tax under paragraph 

(1) shall not be less than the lesser of $100 or 100 percent of the amount required

     to be shown as tax on such return.
   (b) Penalty imposed on net amount due
     For purposes of -
       (1) subsection (a)(1), the amount of tax required to be shown  on the return 
       shall be reduced by the amount of any part of the  tax which is paid on or 
       before the date prescribed for payment of the tax and by the amount of any 
       credit against the tax which may be claimed on the return,
       (2) subsection (a)(2), the amount of tax shown on the return shall, for 
       purposes of computing the addition for any month,  be reduced by the amount 
       of any part of the tax which is paid on or before the beginning of such month 
       and by the amount of any credit against the tax which may be claimed on the 
       return, and
       (3) subsection (a)(3), the amount of tax stated in the notice and demand shall, 
       for the purpose of computing the addition for any month, be reduced by the 
       amount of any part of the tax which is paid before the beginning of such month.

(c) Limitations and special rule

(1) Additions under more than one paragraph

With respect to any return, the amount of the addition under paragraph (1) of subsection (a) shall be reduced by the amount of the addition under paragraph (2) of subsection (a) for any month

    (or fraction thereof) to which an addition to tax applies under
     both paragraphs (1) and (2). In any case described in the last
     sentence of subsection (a), the amount of the addition under
     paragraph (1) of subsection (a) shall not be reduced under the
     preceding sentence below the amount provided in such last
     sentence.
     (2) Amounts of tax shown more than amount required to be shown
       If the amount required to be shown as tax on a return is less than the 
       amount shown as tax on such return, subsections (a)(2)
       and (b)(2) shall be applied by substituting such lower amount.
   (d) Increase in penalty for failure to pay tax in certain cases
     (1) In general
       In the case of each month (or fraction thereof) beginning after  the day 
       described in paragraph (2) of this subsection, paragraphs
     (2) and (3) of subsection (a) shall be applied by substituting
     1 percent for 0.5 percent each place it appears.
     (2) Description
       For purposes of paragraph (1), the day described in this
       paragraph is the earlier of -
         (A) the day 10 days after the date on which notice is given under section 
         6331(d), or
         (B) the day on which notice and demand for immediate payment is given under 
         the last sentence of section 6331(a).
   (e) Exception for estimated tax
     This section shall not apply to any failure to pay any estimated tax required to 
     be paid by section 6654 or 6655.
   (f) Increase in penalty for fraudulent failure to file
     If any failure to file any return is fraudulent, paragraph (1) of
     subsection (a) shall be applied -
       (1) by substituting 15 percent for 5 percent each place it appears, and
       (2) by substituting 75 percent for 25 percent.
   (g) Treatment of returns prepared by Secretary under section
       6020(b)
     In the case of any return made by the Secretary under section
   6020(b) -
       (1) such return shall be disregarded for purposes of
       determining the amount of the addition under paragraph (1) of
       subsection (a), but
       (2) such return shall be treated as the return filed by the
       taxpayer for purposes of determining the amount of the addition under paragraphs(2) 
       and (3) of subsection (a).
   (h) Limitation on penalty on individual's failure to pay for months during period
       of installment agreement In the case of an individual who files a return of 
       tax on or before the due date for the return (including extensions), paragraphs (2) 
       and (3) of subsection (a) shall each be applied by  substituting 0.25 for 
       0.5 each place it appears for purposes of determining the addition to tax 
       for any month during which an installment agreement under section 6159 is in 
       effect for the payment of such tax.