by: John Alan Cohan
Attorney at Law

A surprising number of people have not filed tax returns for three years or more. Eventually, they realize the IRS will catch up with them. Research shows that most non-filers are financially sophisticated, successful professionals, including attorneys and accountants. Non-filers are often workaholics. They realize they will ultimately be discovered, and they know there will be financial penalties from failing to file.

Some will seek to defend themselves on the grounds of mental illness rather than an intent to disobey the law. A psychiatrist, Stephen Coleman, has identified a “failure to file” syndrome, and he has treated quite a few patients, to some degree with anti-depressants. Some factors that can affect a person's mental state are depression, anxiety and chronic procrastination.

IRS Code section 7702 makes willful failure to file a misdemeanor. Willfulness is defined as a “voluntary, intentional violation of a known legal duty.” According to Dr. Coleman failure to file syndrome is a psychiatric disorder that could help prove that the disorder prevented the individual from forming the requisite willfulness to violate section 7702.

In cases where a criminal complaint is filed the defendant has the opportunity to put forward a mental incapacity defense, with psychiatric testimony about his mental condition, to help prove lack of willful intent.

Often it does not go that far: The IRS will simply ask you to file your returns and impose a late-filing penalty or, in some cases, will file the return on behalf of the taxpayers themselves, reconstructing the estimated income and determining what tax should be for the years in question.

Last year, a top aide to Gov. David A. Paterson of New York claimed he suffered from “failure to file” syndrome in a case involving his failure to pay taxes for five years.

The Government can rebut a “failure to file” syndrome with evidence that the defendant made previous filings or that his personal and professional accomplishments made it clear that the failure to file was voluntary and willful.

Of course, the IRS is quite skeptical of people saying they didn't file because they have an aversion to completing tax returns or that they are constant procrastinators. That is a big reason why people hire accountants -- to prepare the forms and to make it easier on themselves. It is fairly common for people to hate filling out and submitting forms of all kinds, including insurance claim forms, mortgage applications or job applications. To convert this into a mental syndrome to avoid criminal charges of tax evasion is a difficult task for a defense lawyer, but at times it can be successful.

The IRS will usually solicit you to file tax returns if you have failed to do so before taking any drastic action. In the IRS Fraud Handbook, used by staff to determine whether a case should get a criminal referral--the staff considers whether there have been repeated contacts by the IRS, whether there is likely to be substantial tax liability, and whether there are a large number of cash transactions. If they decide to go the criminal route they will stop soliciting you to file tax returns, and they will stop discussing tax liability, penalties, or fraud with you.

There will be investigation of whether the taxpayer is attempting to conceal or transfer assets to evade collection, whether the taxpayer has furnished a false W-4 to his employer, whether the taxpayer has used dummy business entities, bank accounts under assumed names or false SSNs in an attempt to conceal income, and so on.

In some cases people who have not filed tax returns for several years owe a lot in taxes. In order to set things right it is imperative to contact a tax attorney--never attempt to re-enter the tax system on your own under these circumstances. The IRS can and does prosecute tax crimes based on voluntary disclosure. A voluntary “confession” of a tax crime is a big mistake that can open up a Pandora's Box. Most criminal tax prosecutions are based in large part upon voluntary disclosure of information by the taxpayers. A tax attorney can help correct the situation and negotiate down the civil tax fraud penalty and help avert criminal prosecution (provided you are willing to pay the amount of tax due).

[John Alan Cohan is a lawyer who has served the livestock, farming and horse industries since l98l. He serves clients in all 50 states, and can be reached by telephone at (3l0) 278-0203 or via e-mail at [email protected], or visit his web site at JohnAlanCohan.com.]

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