Failure to Pay Estimated Tax: What U.S. Taxpayers Need to Know

High-income and high-net-worth taxpayers who do not receive regular income with tax withholdings must file quarterly estimated tax returns with the Internal Revenue Service (IRS). Failure to file estimated tax returns when required can not only trigger steep penalties, but it can also trigger scrutiny in the form of an IRS audit or investigation. With this in mind, what do you need to know if you are behind on your federal estimated tax filings? Texas tax attorney Lawrence Brown explains:

Understanding the Obligation to Make Estimated Tax Payments

Many high-income and high-net-worth taxpayers are required to make quarterly estimated tax filings. As the IRS explains:

“Taxes must be paid as you earn or receive income during the year . . . . [I]f you receive income such as interest, dividends, alimony, self-employment income, [or] capital gains . . . you may have to make estimated tax payments. . . . Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.”

As the IRS also explains, “[i]f you don’t pay enough tax through withholding and estimated tax payments, you may have to pay a penalty.” The IRS imposes a failure-to-pay penalty for unpaid quarterly estimated taxes as well. Unpaid taxes also begin accruing interest immediately, and the IRS imposes interest on unpaid penalties. This interest can continue accruing indefinitely, and this can significantly increase the amount that delinquent high-income and high-net-worth taxpayers owe the IRS.

What Are Your Options if You Failed to Make Estimated Tax Payments?

In light of the potential for substantial additional liability in the form of penalties and interest, what can (and should) you do if you have failed to make estimated tax payments to the IRS?

In this scenario, the last thing you want to do is ignore your situation. It isn’t going to go away, and, as we just discussed, interest will continue to accrue indefinitely. Additionally, the more you owe the IRS, the more likely you are to face an audit or investigation. If you have knowingly ignored your estimated tax obligations, this can increase the risk of facing IRS scrutiny.

In some cases, it may be advisable to simply file a delinquent return, pay the amount owed, and move forward. However, you should only consider this option if both: (i) you do not have any other outstanding tax compliance issues; and (ii) you have not knowingly failed to pay (or underpaid) your estimated tax liability. Submitting a delinquent filing and late payment could trigger scrutiny from the IRS, and your delinquent filing and late payment will not insulate you from any other civil or criminal penalties to which you may currently be exposed.

It is also worth considering that even if you have failed to timely pay your estimated taxes, you may still be able to mitigate your liability by disputing the amount of your penalty, seeking penalty abatement, or negotiating a settlement with the IRS.

If you willfully failed to pay your estimated taxes when due, this is a different scenario. In this scenario, you could be at risk of facing criminal charges for tax evasion or tax fraud, and you need to be extremely careful about your next steps.

Willful tax evasion and tax fraud are serious federal offenses. Not only do they carry substantial fines, but they also carry prison time under federal law. Since filing late does not protect you against facing an IRS audit or investigation, this scenario requires a proactive approach guided by the advice and representation of an experienced Texas tax attorney.

When you are at risk of facing criminal prosecution for willful tax evasion or tax fraud, your best option may be to submit a voluntary disclosure to the IRS Criminal Investigation (IRS CI). Voluntary disclosure is specifically an option for resolving high-stakes tax controversies with criminal implications. While submitting a voluntary disclosure can lead to a settlement with the IRS, a settlement is not guaranteed. If the process is unsuccessful, you may still face prosecution as a result of your voluntary disclosure. As a result, it is imperative that you rely on the advice and representation of experienced tax counsel every step of the way.

Which Option Should You Choose?

Given everything we’ve discussed, which option should you choose if you are a high-income or high-net-worth taxpayer and you are behind on your estimated tax filings? Ultimately, the answer to this question depends on several factors, including (but not limited to):

• How far behind you are on your estimated tax filings and payments;
• How much you currently owe the IRS in back taxes, interest, and penalties;
• Whether you inadvertently or willfully failed to make one or more estimated tax filings;
• Whether you have willfully ignored your obligations after discovering that you were behind on your estimated tax filings, and,
• Your eligibility for forms of relief, such as penalty abatement and submitting an offer in compromise.

While there are several potential options available, typically, one option will make the most sense under the specific circumstances at hand. The key is to identify this option—and then pursue it diligently before the IRS launches an audit or investigation. Once the IRS opens an inquiry, some of your options go off the table, and, in this scenario, avoiding unnecessary consequences can prove to be a much more challenging, costly, and uncertain process.

Contact Brown Tax, P.C. to Request a Call with Texas Tax Attorney Lawrence Brown

If you are behind on your estimated tax payments, it is critical that you make informed and strategic decisions about your next steps. Texas tax attorney Lawrence Brown represents high-income and high-net-worth taxpayers in complex IRS matters nationwide. To request a call with Mr. Brown, please call 888-870-0025 or contact us confidentially online today. If we can help, we will arrange a time for you to speak with Mr. Brown in confidence as soon as possible.