Unfiled Tax Returns? There are some things you need to know

Posted by Michael S. Anderson | Nov 23, 2012 | 0 Comments

Sharing income with the Government is a burden and a responsibility we share. Many of us think that it is the worst way to raise revenue, but it is the law and failure to do so can result in serious problems. Despite this, there are millions of people in the U.S. who are late filers. If you are a late filer you are worried and want to do something about it.

Here are several things to consider as you prepare the returns.

1. You are going to lose some refunds

The IRS is allowed to keep the refund you were supposed to receive if you don't file the return in question within three years of its due date.

2. Lost Earned Income Credit

That same 3-year rule applies to the Earned Income credit. Don't file the return within 3 years of due date? Lose it as well.

3. Your debt will be larger than it should have been

The IRS gets to tack on a penalty for filing the return late and a penalty for paying late. Interest is added to the debt and the penalty amounts. Old return filings cause the debt to be doubled in many cases.

4. IRS Substitute Return

The law requires that people who pay you tell the IRS about it. The IRS can use this documentation to create a return for you. It then uses the return to collect even though it is usually over-stated and incorrect. In our office, this is a big problem, as many of our clients could have removed tens of thousands of dollars of tax debt via bankruptcy if they had filed the return before the IRS filed the substitute return.

5. IRS Prosecution

The willful failure to file a tax return is a misdemeanor and can result in a sentence of up to one year in prison for each tax year not filed. The IRS does prosecute the cases.

6. Avoiding IRS Prosecution

Most people with unfiled returns aren't charged with a crime for a few reasons:

a. It is difficult for the IRS to get to everyone. There are lots of non-filers and not enough employees in relation. This is changing thanks to upgraded computer systems. b. If you come forward before an IRS investigation or examination ensues, you should avoid prosecution. This is current IRS policy. c. The IRS can't prosecute the failure to file a tax return if the return was supposed to be filed more than 6 years ago.

7. The substitute return can be “replaced”

The substitute return mentioned above can be replaced via the audit reconsideration process. The IRS will typically accept your correct return and replace its incorrect substitute return with it. There are situations in which you will want to leave the return the IRS has done in place. Get some help with this.

8. IRS files first? Bankruptcy probably won't wipe away all of the debt

In most Jurisdictions, an IRS substitute tax return ruins your ability to treat the debt as dischargeable in bankruptcy. I constantly tell people with unfiled returns who think they may owe large sums when the returns are filed to file them right now. You must beat the IRS to the punch because bankruptcy may be your best option and you will ruin your chances to use it by filing after the IRS does.

9. The Tax Return doesn't have to be perfect.

Many people don't get the returns done because they feel like they don't have all the proof they need to create a correct return. A perfect return isn't required though. You can recreate the numbers using a reasonable basis and make a best estimate. The “Cohan Rule” has helped thousands who don't have good records.

About the Author

Michael S. Anderson

Michael Anderson has been representing Arizona clients with tax debt problems for two decades and has helped his clients eliminate millions of dollars in tax debt. His tax debt practice is limited to helping individuals and the self-employed who have serious IRS problems.


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