With the October 15 filing deadline approaching for individuals (and calendar-year C corporations) who have obtained extensions to file their income tax returns, it is worth reflecting on the dangerous consequences of falling behind with filing tax returns, particularly if you are a licensed professional, or your ability to work either as an individual or business entity is dependent on a federal or state license or regulation. Although this article focuses on the consequences of failing to file federal and New York State tax returns, the general principles we discuss apply to licensed professionals and other licensees in other states as well. Civil or criminal penalties are regularly imposed on tax non-filers who are discovered during IRS and state tax audits and investigations, but both the IRS and the New York State Department of Taxation and Finance periodically undertake specific initiatives aimed at identifying licensed professionals who have failed to file their tax returns. Licensed professional may also be caught up in a new IRS initiative aimed at non-filing high income individuals.
An individual may risk losing her professional license if convicted of criminal failure to file tax returns or a related tax crime under federal laws, New York State laws, or other state laws. A license will be in jeopardy for anyone who practices or works, for example, as an attorney, a certified public accountant, or a doctor; a stockbroker or commodities broker; or a real estate broker, registered nurse, or even a funeral director. License disqualifications for individuals and for entities are also common in highly regulated industries such as legalized gambling or the sale of alcoholic beverages, and convicted individuals or entities may lose, or become ineligible for, government jobs or contracts.
In this election year, it is also relevant that the U.S. Constitution grants the right to vote in federal elections to all persons eligible to vote in state elections, so a person convicted of a felony who resides in one of the many states that disqualifies felons from voting, including New York State, is disenfranchised in both federal and state elections.
Under federal law, willfully failing to file a tax return is a misdemeanor that may carry a jail sentence of up to a year for each year of non-filing. However, if the failure to file is accompanied by some affirmative act likely to conceal or mislead, including keeping a double set of books, destroying records, or reorganizing transactions to avoid creating normal financial records, a non-filing taxpayer may be guilty of the felony of tax evasion, with possible imprisonment of up to five years and a substantial fine and restitution. Under New York State law, committing a tax fraud act, which includes not filing a required return, is a Class A misdemeanor. However, if an intent to evade any tax due can also be proven, a taxpayer will be guilty of various degrees of felonies, ranging from Class E to Class B depending on the amount of unpaid tax. A business entity may also be criminally charged with failure to file returns or tax evasion.
To step back from criminal issues for a moment, civil penalties for failing to file required tax returns can be substantial. Under both Federal and New York State laws, there is a penalty of 5% of the balance of tax due per month or part of a month for which a return is filed late, up to a maximum of 25%. If the IRS determines that a failure to file resulted from civil fraud, the penalties can increase to a maximum of 75% of the unpaid tax. In addition, the statute of limitations on assessment and collection of unpaid taxes and penalties does not begin to run until a delinquent return is filed, and interest will always run on any unpaid tax liability.
Returning to the possibly ruinous effects of convictions for failure to file returns, or tax evasion related to failure to file returns, the potential losses of professional and other licenses under federal and New York State laws include, but are by no means limited, to:
Consequences to Individuals Under Federal Laws and Regulations:
- A practitioner before the IRS may be disbarred, suspended, or censured.
- An attorney’s admission to the U.S. Tax Court may be revoked or suspended.
- A paid tax return preparer’s IRS registration may be revoked.
- A securities broker or dealer registration may be revoked or suspended if the broker or dealer is convicted of a crime involving “fraudulent concealment,” which may include tax evasion. In addition, while a conviction of tax evasion is not specifically listed as grounds for revocation or suspension of a registration, if the tax evasion was also prosecuted as mail fraud or wire fraud, as tax evasion may be, a convicted broker’s or dealer’s registration will be revoked or suspended.
- An individual authorized to appear or practice before the SEC will be suspended upon conviction of either a felony or a misdemeanor involving moral turpitude (which includes tax offenses).
- A physician’s Medicare billing privileges may be revoked for a felony conviction.
Consequences to Individuals Under New York State Laws and Regulations:
- An attorney may be disbarred, suspended or censured. An attorney convicted of a felony is automatically disbarred, although she may later be reinstated.
- A CPA’s license may be revoked or suspended, or the CPA may be placed on probation.
- A physician’s license may be revoked or suspended, or the physician may be placed on probation and/or censured.
- Similarly, a psychologist’s license, an architect’s license, or a registered nurse’s license may be revoked or suspended, or the psychologist, architect, or RN may be placed on probation.
- A real estate broker’s license may be revoked or suspended.
- A teacher’s certificate may be revoked, suspended, or partially suspended.
- A person convicted of a felony will not be granted a liquor license.
- The license of a funeral director convicted of a felony will be revoked.
Consequences to Entities Under Federal Laws and Regulations:
- A federal contractor may be suspended or debarred.
- A business may be ineligible for federal contracts from the outset.
- An entity may be ineligible to operate as an issuer in a securities transaction if a principal is convicted.
- An entity may be barred from affiliation with an FDIC insured bank if a director, officer, employee or controlling shareholder is convicted of tax evasion; and an FDIC contractor may be suspended if a principal is convicted of a felony or any offense “indicating dishonesty or lack of integrity,” which may include failure to file tax returns.
- Under Federal Housing Finance Agency regulations, a possible suspension order if a principal is convicted of a felony may disallow an entity’s affiliation with the Federal Home Mortgage Corp, the Federal National Mortgage Association, and/or the Federal Home Loan Bank.
Consequences to Entities Under New York State Laws and Regulations:
- A business may be ineligible for a certificate of authority to collect sales/compensating use tax.
- A business may be refused a liquor license.
- A business may be refused registration as a motor fuel distributor.
- A business may be refused a license as a lottery sales agent.
If you are concerned about not having filed timely individual or entity federal or state tax returns, or have concerns about any other issue discussed in this article, please contact Kostelanetz & Fink, LLP for advice.