Millions of Americans fail to file tax returns each year for various reasons. The most common reason we see is simply procrastination combined with a dash of fear. Every late tax return filer worries about what the consequences might be. Some think about it every day of their lives. If this sounds familiar, here are nine things you need to know.
1. Lost Refunds In order to receive a refund if you are owed one, the return must be filed within three years of the due date. Yes ¦they will keep it no matter how large it is, and yes it is often a very large windfall for the government.
2. Lost Earned Income Credit
The 3 year rule strikes again. Failure to file within that time period means that your “Earned Income Credit” will be lost as well.
3. Lost Social Security Benefits
If you are self employed, you have to file returns reporting self employment income within three years of the due date in order to receive social security credits toward retirement.
4. Increased Debt
Penalties for failure to file and failure to pay on time add up and interest grows on those penalties and the underlying debt. These additions often double the debt by the time the returns are filed.
5. Substitute Tax Returns
Income is reported to the IRS both from employers and from others. So, even if you are self employed, the IRS may have information about how much your clients paid you in a given year. At some point, the IRS will use that information to create a tax return for you. It won't be correct, as it won't contain correct deductions. It can be used to assess a debt and begin the collection process however. The assessment of the tax based on a substitute return can also create other serious problems related to future tax debt options like bankruptcy.
The IRS is starting to catch up to the computer age. It can charge non-filers with a crime. The willful failure to file is a misdemeanor and can result in a sentence of up to one year in prison for each tax year not filed.
7. Avoiding Prosecution
Most people with un-filed returns will avoid criminal prosecution for three reasons.
a. Numbers: It is difficult for the IRS to get to everyone right now. There are just too many non-filers and too few employees in relation.
b. The Voluntary Compliance Program: If the non-filer attempts to come forward before an IRS investigation or examination ensues, he or she will usually avoid prosecution related to the failure to file the returns.
c. IRS can't prosecute after six years: The IRS is barred from prosecuting the failure to file a tax return if the return twas due to be filed more than 6 years ago.
8. The substitute return can be challenged
The substitute return mentioned above can be challenged via the audit reconsideration process. This means that even though the IRS has filed the return with incorrect numbers, it will consider and usually accept your correct return even if filed much later. Whether it makes sense to use this process to deal with the debt, depends on the individual circumstances of the case.
9. If the IRS files Substitute Returns First – You can probably forget using Bankruptcy later to discharge the debt.
In most Jurisdictions, the filing and assessment of a substitute return by the IRS before you file the correct return makes it difficult to treat the tax debt as dischargeable in bankruptcy. If you suspect that you may owe a large amount of income tax debt and want to preserve the ability to discharge it in bankruptcy later, your returns should be filed before the IRS gets a chance to do it for you.