Their Conscience, or the IRS, Usually Catches Up With the Non-Filers

Abe had a deep, dark secret locked in his conscience.

None of his friends knew what was troubling him. His minister, neighbors and clients at work hadn’t a clue. Not even his wife of 25 years.

But he’ll be coming clean, he says, when he files his first federal income tax return in about two decades.

“I want to pay my taxes. That was one lie I had in my heart I couldn’t stand,” said the 58-year-old self-employed businessman from the Atlanta area, who asked that his real name be concealed since he only recently turned himself in to the Internal Revenue Service.

“I feel as though a load is being lifted from me . . . like I have a new lease on life.”

Yet for every person like Abe, there are millions more underground, failing to file their tax returns for a variety of reasons. Some do so with the intent of cheating the government, but others may act in protest, and many more will drop out from sheer procrastination. Most feel uncomfortable about this decision.

“The amazing thing is how this cuts across all strata--all professions, all socioeconomic groups,” said Frederick W. Daily, a San Francisco tax attorney and author of “Stand Up to the IRS.”

“I’ve had a bank president, lawyers, politicians (as clients). There’s also a significant number of attorneys and tax preparers, believe it or not.”

An estimated 10 million individuals and businesses fail to file returns each year. Ironically, about a third of them are actually due refunds while the rest owe between $7 billion and $10 billion, according to U.S. Treasury statistics.

Looking to bridge the tax gap, the IRS instituted a program in 1992 to get prodigal taxpayers back into the system. The agency promised, among other things, to make prior-year tax forms available, to let non-filers use a repayment plan for back taxes and not to criminally prosecute those who stepped forward voluntarily. (The IRS even offers rewards to those who turn scofflaws in.)

Individuals who need help filling out the forms are also being encouraged to contact the Volunteer Income Tax Assistance program, said Anthony Burke, an IRS spokesman.

Tax professionals and IRS employees say more non-filers are drawn out during tax season than any other time of the year.

“I guess their consciences start to bother them,” said James E. Jenkins, author of “Failure to File,” who also runs a Southfield, Mich., accounting firm that bears his name. “They may be talking to people and during the conversation someone asks if they’re getting a tax refund this year . . . and here they are having not filed a return.”

Jenkins says most of the hundreds of non-filers he’s encountered had experienced a personal crisis. Many had gone through an expensive divorce, lost a job or money in a business and simply couldn’t afford to pay their taxes.

“The individual might be depressed and stop taking care of many responsibilities,” he added. “Year two maybe he’s back on track, but because he doesn’t hear from the IRS he feels he might not get caught and again doesn’t file. . . . Then it starts to snowball.”

But the reality is that most people eventually get caught.

“It (the IRS) is such a slow-moving machine of bureaucracy. It just takes time to chase these people because there are so many of them,” said Daily.

He estimates the IRS is at least a year or two behind in notifying the non-filers it discovers. But if you haven’t been caught within six years after not having filed, you’re probably off the hook, tax professionals say.

The nation’s 112 million salaried employees are the easiest to find.

The IRS has a sophisticated system that matches information documents--W2 wage statements and 1099 income reports, for example--against tax returns on file. If the computerized matchup fails to find a return, the IRS initiates a delinquent taxpayer investigation.

That’s how it nabbed Marcy Hayes, a 35-year-old marketing specialist from the Midwest.

Hayes, who didn’t want her hometown revealed, says she failed to file her 1988 and 1989 returns because she had misplaced her records in a move from the West Coast. She also had recently given birth to her first child and switched jobs.

“It wasn’t like I was hiding. I just had a million things to do at the time,” she said. “I did feel a bit like a fugitive. Now I feel like a citizen again.”

In one of the absent returns Hayes would have been due a refund, but that was offset by the $1,000 in penalties and interest charges compounded on the other return in which she had owed a small amount of tax.

It’s only a crime not to file a return if taxes are owed, although taxpayers will forfeit their right to collect refunds after three years from the return’s original due date.

Self-employed non-filers can be a bit difficult to catch, especially if they’re doing business off the books or moving around a lot.

Abe managed to elude the system for 20 years because his period of non-filing began before the IRS had its computerized matching system in place, said Jenkins, his accountant. Abe said he reluctantly stopped filing his returns the year he lost money in his business and couldn’t afford to pay the taxes he owed.

His undoing came when a business associate asked for his Social Security number. He gave his wife’s number instead, and somehow the IRS discovered that she hadn’t filed an income tax return in years. Although she held no jobs, she did have a bank account.

That’s when he finally decided to turn himself in. “With penalties, I probably owe . . . in the six figures,” he said.

Jenkins said the IRS will likely concentrate on the last three to six years of missed returns.

“You’re kind of beating a dead horse otherwise,” he said.

Non-filers who owe large amounts of back taxes, penalties and interest could go to jail in rare instances. But there also is a chance for them to wipe their tax slates clean through a little-publicized program called “an offer in compromise,” tax professionals say.

The IRS, however, will usually only accept less than is owed if it’s reasonably sure there’s little chance of ever collecting the full bill, they say. What that usually means is taking a person’s net assets down to zero.

Cynthia Summers, a 38-year-old bank loan officer from Oakland, owed $8,000 for not filing two years of tax returns, plus failing to pay taxes in three other years during the ‘80s as part of a war tax resister protest.

She recently got the IRS to accept $2,000 after documenting several past crises: the loss of her home, a mugging and a drinking problem.

“I feel immensely relieved,” she said.