Failure to file: What if it is ‘willful’?

The monetary penalty for failure to file an income tax return is a maximum of 25 percent of the unpaid taxes.

Criminal prosecution is also possible, however, if tax authorities believe the failure to file was a willful attempt to evade taxes or commit tax fraud.

In this post, we will take note of a recent case in which a partner at an accounting firm was arrested on tax fraud charges after allegedly failing to file for three consecutive years.

The case occurred in New York state and involved state, not federal taxes. Authorities arrested a 56-year-old man who was an attorney and certified public accountant working for the PricewaterhouseCoopers firm.

According to the charges, the man did not file tax returns from 2010 to 2012 and owes the state more than $86,000 for those years.

The man pleaded not guilty and was released on personal recognizance, rather than held in jail. But he faces prison time if he is convicted of the charges.

It remains to be seen whether those charges will stick. But whatever happens in that particular case, it’s worth considering how the IRS or state authorities tend to view “willfulness” when it comes to noncompliance with tax law.

This is important because in the context of taxes, “willfulness” is not synonymous with intent. As Forbes columnist Robert Wood pointed out in a recent piece, “willfulness” can occur even if a taxpayer did not actually intend to depart from legal requirements.

Willfulness can also apply to conduct that is meant to conceal, such as filing certain tax forms but not others – or not filing at all.