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Procrastinating on your tax returns is bad enough. Skipping out on them — and the taxes owed — could put you in a lot of hot water.
Michael Avenatti, formerly a lawyer for adult film actress Stormy Daniels, was charged with bank fraud and wire fraud on Monday.
Federal authorities allege the attorney gave a Mississippi bank phony tax returns for 2011, 2012 and 2013 in order to obtain $4.1 million in loans.
In reality, Avenatti didn't file personal income tax returns for those three years, authorities said. He also didn't make any estimated tax payments in 2012 and 2013, according to the U.S. Attorney's Office in Los Angeles.
Avenatti also allegedly still owed the IRS $850,438 in unpaid personal income taxes, plus interest and penalties for 2009 and 2010, according to the federal complaint.
Separately, the lawyer was arrested on Monday on charges that he was trying to extort more than $20 million from apparel maker Nike. Avenatti was released from Manhattan federal court after signing a $300,000 personal recognizance bond.
As much as you hate to filing your taxes this spring, the IRS has ways of tracking down your income and making sure you pay what you owe.
"If you don't file a return, even if you've been doing nothing — no tax shelters and no fraud — the IRS gets an unlimited amount of time to review your tax affairs," said Joshua Blank, professor of law at the University of California, Irvine School of Law.
Generally, those who fail to file their return by April 15 are subject to a penalty of 5 percent of the unpaid tax, applied each month that the tax return is late. This penalty tops out at 25 percent of the amount due.
Failure to pay your taxes comes with a 0.5 percent penalty if you haven't paid by April 15, up to a maximum of 25 percent. The IRS will continue to assess this charge on the remaining unpaid balance each month.
Once you've turned in your Form 1040, the IRS typically has up to three years from the due date of the return to audit you.
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If you've omitted more than 25 percent of your gross income on your return, the IRS has up to six years to examine your 1040 and slap you with taxes owed.
Failing to submit a return altogether won't keep the taxman from cracking down on unreported income.
"If you don't file at all, the IRS isn't subject to any statute of limitations," said Blank. "It can review your individual tax situation forever."
The IRS has a number of ways to detect income you've received and failed to report.
For instance, your employer will let the IRS know that you've earned wages and withheld taxes. The same goes for interest your bank pays to one of your accounts or dividends received in a brokerage account, said Blank.
This is known as "third-party reporting," and it's a way for the IRS to find out whether you've received any money.
Concerned parties could also let the taxman know about your shady sources of income through whistleblowing and the IRS tip hotline.
Finally, the IRS can detect suspicious returns and tag them for audit by using a computer program known as the Discriminant Inventory Function System.
"The IRS is comparing your return to those filed by other people similar to you," said Blank. "If your return deviates significantly, you get a high DIF score, and that causes the IRS to audit you and find out you have unreported income."
Once your income reaches a certain level, you need to file.
For the 2018 tax year, if you're single and under 65, you need to submit a return if your gross income was at least $12,000. For married couples under that age, the threshold is $24,000.
If you're 65 and over, you'll need to file if your gross income is at least $13,600.
That number goes up to $25,300 for married couples if one spouse is over 65, and $26,600 if both are at least that age.
It makes sense to file, even if you don't have to.
"There are certain tax benefits where, even if you have very little income, you need to file a Form 1040 to claim them," said Blank. "The most common is the earned income tax credit."