Filing Tax Returns, Even if Past Due

Perhaps you’ve wondered, am I a fool for filing my tax returns? Why not roll the dice and see if the IRS catches me? Our response is that you are most definitely not a fool for filing your returns, and there are many excellent reasons why everyone should file (and there are no good reasons not to). First, a preliminary point. There is no statute of limitations for nonfiling. Therefore, no matter how long ago the tax year, the IRS can come after someone if they did not file a tax return for that year. On the other hand, if someone does file a tax return the IRS has a limited period of time in which to challenge the return, generally three years from the filing or due date. So if you file a good faith tax return you will have peace of mind that, upon expiration of the statute of limitation, the return is final and no IRS audit of that return can occur and no additional assessment can be made.

 There are many bad consequences which can occur where someone does not file their tax return, and we’ll highlight the most severe. At the top is that the willful failure to file a return or pay tax is a criminal offense. Does that mean that every nonfiler who’s caught gets sent to prison? No. But that prospect is out there, and it’s greater where someone is willfully evading their responsibility to pay tax. Voluntary compliance by coming clean and filing past due tax returns and paying the tax due is always a factor benefitting the nonfiler in the eyes of the IRS.

If tax is owed, then penalties and interest continue to run until the outstanding liability is paid in full. Needless to say these will grow considerably over time; the penalties and interest on a liability that’s five years old will likely be significantly greater than a one year old liability. Ignoring the responsibility to file and pay will therefore result in additional expense. If the IRS catches on that someone has not filed a tax return, it may construct a substitute tax return based on information it’s received, such as W-2s and 1099s. In virtually all cases this will result in a higher tax being calculated than would occur if the individual prepared and filed a tax return. Among other things, the version constructed by the IRS will not include all applicable deductions or the cost basis for securities sales. And if the person does not pay the tax as so calculated by the IRS and a notice of deficiency gets issued, the person may become subject to wage garnishment, lien, or seizure of property.

In some cases a person might actually be entitled to a refund if a tardy tax return is filed. Tax withholding, typically from wages, may exceed the tax liability. However, remember the three-year time frame mentioned earlier for the IRS to challenge a filed tax return? That same three years also limits the IRS in issuing refunds. That is, the IRS cannot issue a refund for a tax return filed more than three years after the initial due date.

Even if someone cannot pay their tax liability in full, they should nevertheless file a return. The IRS has various programs in place, such as offer in compromise and installment agreements, for people without current means of paying their liability, but these programs are only available to people in compliance with their filing requirements. We’ve been encouraged by the IRS’s willingness to work with people in these circumstances, but the burden is on the delinquent taxpayer to take the first step. For these, and many other reasons, everyone should file their required tax returns, including returns from past years that are currently overdue. Your KOS professional is here to help and discuss this situation as it may apply.