UNFILED TAX RETURNS
Why It’s Important to File
It’s important to file a return, because
IT’S THE LAW. Failure to file a return is a crime. However, not paying the
tax is NOT a crime; it simply subjects you to financial penalties. Filing
frivolous tax returns or false tax returns will also get you into big
trouble that can cost you more than a few dollars in penalties and interest.
Why most people don’t
file
Fear of owing the IRS and
not being able to pay –
It’s better to file, even if you can’t pay the tax in full. The penalty for
not filing a tax return can be 25% of the tax in as little as 5 months. The
penalty for filing, but not paying on time is only 2.5% for the same period.
Interest applies on top of the debt. The IRS has a big stick to make you
want to file: criminal penalties. In addition to its ability to charge high
penalties, the IRS can charge non-filers with a crime. But here’s what’s
really interesting: fully half of the non-filers end up not owing a dime for
one or more years and miss out on a tax refund!
Not able to
find information to complete a return – Much of the
information one needs to complete a tax return is available through other
sources. In other cases, reasonable estimates can be made in order to
prepare a tax return. If data can’t be found by the due date, the IRS allows
you to file a corrected return at a later date.
Fear of
being caught for not filing another return – this is a common
myth. In this day and age of powerful computers, the IRS still can’t
“connect the dots”. Their systems are just not programmed to pick up on
whether or not a prior tax return was not filed when you file this year’s
return. The only part of the IRS system that generally handles multiple
years of data is called the Master Debtor File (MDF). The MDF only is
activated when you have a refund on a current return and the system checks
to see if there are outstanding debts for other years. However, if a tax
return is unfiled, the information does NOT appear in the MDF automatically
until either a return is filed or a Substitute Return is created (see How
the IRS handles unfiled tax returns below). If the IRS wants to look for a
pattern of non-filing, it generally requires a human to manually put
together a file on a taxpayer.
Separated
From Spouse / Can't get the information -- There are ways
that we can handle spouses that don't get along. If you don't want to talk
to your spouse / ex-spouse, then we can either file a return that the IRS
can complete or we can work with each taxpayer independently. Since both
partners have a legal consequence to not filing, there is usually one way or
another we can help you get the information we need to file a tax return.
You know you
are getting a refund, but the IRS will seize it and you don't want to pay
-- Just because YOU think you are getting a refund, doesn't mean the IRS
thinks so. In order to qualify for a refund, you must first file. The worst
that can happen in this situation is that you don't file and the IRS files a
Substitute Return and assesses tax against you. The second-worst thing is
that you, indeed, do qualify for a refund, but if you don't claim it in
time, you lose it automatically! Sometimes, even if you have another debt,
we can still get a refund for a specific tax return if certain situations
apply.
Can't afford
to pay someone to prepare the return -- Many tax preparers
will gladly work with you for payment terms or other consideration. You can
also seek out free tax help from various groups that cater to those that
otherwise can't afford professional help. Each year, the IRS offers free tax
clinics, too.
Forgot about
it – Chances are, if you gave this excuse, you didn’t really
forget about it! So check the other reasons as to why you didn’t file!
How the IRS handles
unfiled tax returns:
When you don’t file a return, the IRS
doesn’t forget about you! Approximately 18 months after the tax deadline,
the IRS runs a program on its computers designed to catch individuals that
haven’t filed or that have under-reported their income. The IRS matches up
the tax return database with the information it has received from other
sources, including W-2’s, 1099’s, K-1’s, etc. If this system determines
that, based on the information it has, that there would be no tax due if the
taxpayer had no itemized deductions, then the computer does nothing. If, on
the other hand, the computer calculates that a tax would be due if there
were no other deductions, then the IRS computer creates something known as a
“Substitute For Return” (SFR). If, based on the SFR the taxpayer owes, then
notices go out requesting a tax return. If they get no response within a
reasonable time, the tax is assessed automatically and the IRS begins its
collection efforts.
What WBTax Can Do To
Help
We will help you gather your information
and we will complete a tax return going back up to 10 years. Generally, the
IRS will not be concerned about returns more than 10 years old, but in
certain circumstances, we may have to go back further. Don’t worry if you
can’t find all the W-2’s and 1099’s, as we can gather that information from
other sources.
The IRS is interested in getting the
back tax returns filed and wants to get you to file returns regularly in the
future. Unless your failure to file returns was caused by willful action
(tax evasion or protest), the IRS will not prosecute non-filing as a
criminal action.
If, after preparing the tax returns, you
owe an amount larger than you can afford to pay, WBTax will work with you
and the IRS to settle that debt in a way that you can afford. The IRS does
NOT put people in jail for not paying their tax! Read about how we can
handle your unpaid taxes here.
Remember, you don’t need to talk to the
IRS. You don’t need to make excuses. But, you must take the first step. Call
our office and set up a confidential, no cost appointment and we’ll lay out
the simple steps for you to get back into compliance with the IRS.
