Imagine this: Dr. Smith, a successful dermatologist in Beverly Hills who generates over $5 million annually, has entrusted his tax filings to a seemingly reputable wealth management firm for five years. They assure him everything is handled, even providing fabricated documents as “proof” of electronic filing. However, Dr. Smith was unaware that his tax returns had never been filed with the IRS.
Years later, during a routine audit, the IRS uncovers the discrepancy. Dr. Smith faces a significant tax burden. Let’s analyze the potential financial blow:
Back Taxes: Dr. Smith could owe over $8.75 million in back taxes to the federal government alone (not including state and local taxes). This is calculated as follows:
- Back taxes = Annual income × Tax rate × Number of years
- Dr. Lee’s annual income: $5,000,000
- Federal income tax rate: 35%
- Number of missing years: 5
- Back taxes owed: $5,000,000 x 35% x 5 = $8,750,000
Penalties: The IRS can add penalties for not filing and not paying taxes on time. These penalties can be as high as 5% per month, up to 25% of the total owed taxes. In Dr. Smith’s case, this could mean penalties reaching $1.3 million per year. Here’s the breakdown:
- Maximum penalty per year = Back taxes × Monthly penalty rate × 12 × Maximum penalty rate
- Monthly penalty rate: 5%
- Maximum penalty rate: 25%
- Maximum penalty per year: $8,750,000 x 5% x 12 x 25% = $1,312,500
Dr. Smith’s total tax liability could be over $10 million with the back taxes and potential penalties.
Regardless of income or tax situation, everyone should verify their tax filings. The IRS offers free online transcripts that provide a reliable record of your tax history. Verifying this information directly with the IRS can prevent similar situations. https://www.irs.gov/
Remember, the longer tax issues go unresolved, the more complex and expensive they become.
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Schedule your tax assessment today by clicking the link below or calling at (408) 708-9330.