You should generally file all required tax returns that are due, regardless of whether or not you are currently able to pay the tax due in full. If you need to ask why, here are three compelling reasons:
1. Avoid Unnecessary Penalties.
Failure to file a tax return will often result in a failure-to-file penalty. This failure-to-file penalty is in addition to (and generally more than) the failure-to-pay penalty. The penalty increases each month your return is late. The IRS will eventually notice that you have not filed. Why tack on an additional penalty which will only increase the amount of tax due? Filing a your tax return, even if it is already late, may help reduce the tax penalties, even if you cannot pay the taxes owed.
2. Get the Clock Ticking.
The collection period in which the IRS can collect taxes on your tax return is limited. (We will discuss this further in another blog post.) However, if you don’t file your tax return, the IRS can come after you at any time, even many years later. By filing your tax return, you are starting the statute of limitations and, thus, are limiting the time period in which the IRS can use its collection powers against you.
3. Get Your Refund and Credits.
Even if you owe taxes for some years, you may be due refunds for others. Your time to receive refunds for withholding or estimated taxes paid is limited to 3 years from due date of the return. The same rule applies to a right to claim a tax credit such as the Earned Income Credit. Self-employed persons who do not file a return will also not receive credit toward Social Security retirement or disability benefits.
What Will Happen If You Don’t File Your Tax Return
1. A Friendly Reminder.
If you don’t file a tax return and the IRS determines that you should have filed and owe taxes, the IRS may send you a “friendly” reminder notice that your tax return has not been received. This means they are onto you and will not relent, so don’t ignore these letters! (By the way, even if you never receive this letter, you may still be obligated to file. Don’t assume you are in the clear.)
2. IRS Prepares Substitute for Return.
If the IRS determines that you have not filed your tax returns and it appears that you owe taxes, the IRS may prepare a return for you and hold you liable for the taxes owed as reflected on this substitute for return. Unfortunately, the amount of tax owed as determined by the IRS is usually MORE than the taxes you really owe. This is because the information used by the IRS is limited and might not give you credit for deductions and exemptions you may be entitled to receive. A tax bill will be sent to you for the tax due, plus penalties and interest.
3. IRS Collection Activities Begin.
Once the IRS determines that you owe taxes, the IRS will begin to use its collection powers against you. This may include levying your bank accounts, levying your wages, recording federal tax liens, seizing your assets, etc. Once the collection process begins it becomes more difficult to stop it. Voluntarily filing your returns and acknowledging your tax debt may eliminate the filing of a notice of tax lien by the IRS thereby damaging your credit. (We will discuss these collection powers in a future blog post.)
Filing Late Tax Returns
A tax professional can assist you in filing your unfiled tax returns and, depending on the circumstances, may:
• contact the IRS to acknowledge your tax filing delinquency and inform the IRS of your efforts to comply;
• gather information from the IRS regarding what sources of income have been reported in connection with your tax return;
• gather information from the IRS regarding what penalties and interest may have been already assessed against you;
• request abatement of penalties and interest wherever possible; and
• request temporary relief from collection efforts to allow additional time to prepare your returns.
Don’t fret! It may be easier than you think to file your late returns and get back into the IRS’s good graces. If you have misplaced the documents necessary to correctly determine your taxes, a tax professional can help you gather or reconstruct them. Even if you can’t pay all (or even any) of your tax due, you have options at your disposal. Be proactive and discuss your options with a tax attorney.
If you would like to consult with us regarding your options, please contact us.