Life happens. Things come up. Sometimes you get overwhelmed by circumstances and do not do the things that you should, when you should. Or maybe you didn’t know at the time that you were required to do anything at all. You may believe that the damage is already done because the due date has come and gone, and things are not going to get any worse. Think again. Here are some of the reasons why you address your un-filed income tax returns sooner rather than later.
1. Failure to timely file an income tax return (that is required to be filed) is a crime
The most important reason to file an income tax return is that you may have a legal duty to do so. Failure to timely file a tax return that is required to be filed, may result in criminal prosecution. You may attempt to reduce your exposure to criminal prosecution by filing your tax returns.
2. You may be subject to higher penalties by not filing your tax return right away
One of the many penalties that the IRS may assess against a taxpayer is the failure-to-file penalty. For many people, it is one of the largest penalties assessed. If you did not timely file your income tax return, you may attempt to avoid a higher failure-to-file penalty by filing your tax return as soon as possible.
3. You will have a high exposure to additional tax assessments and collection action
Generally, the IRS has a limited amount of time to propose to assess additional tax against you and to collect any balances due. However, for each taxable year, these time limits do not begin to run until the associated tax return is filed.
4. Un-filed tax returns are likely causing you continued stress and anxiety
Tax issues typically cause stress. While filing un-filed tax returns may not eliminate all your tax issues, you will hopefully find some level of relief and a clearer picture of the future.
5. The IRS can prepare an income tax return on your behalf
If you do not timely file an income tax return, the IRS may prepare a tax return on your behalf. As you can imagine, the tax return that is prepared by the IRS, is prepared only using the financial information available to the IRS, at the highest tax rate and is normally inaccurate. After the IRS files this tax return, it will try to collect the associated balance due even if it is inaccurate. Under the right circumstances, the IRS has the legal authority to file a lien against you and begin to attempt to collect the associated balance due by issuing bank levies, wage garnishments and/or other collection action.
Further, if the IRS prepared a tax return on your behalf, it may affect your ability to have the associated balances due discharged in a bankruptcy.
6. You may lose out on refunds
If a tax return reflects that you are due a refund, you must generally file the tax return within a specific time period or you will lose the refund. In addition, if the tax return is filed after the time allotted, the IRS will not apply the refund for this year to a balance due for another year. Over the years, I have seen tens of thousands of dollars forfeited merely because a tax return was not filed at the right time.
7. You may lose out on credits
Tax laws change quite often. Some tax law changes result in tax credits that may significantly reduce your taxes. However, if you do not file your income tax return within a specific timeframe, the IRS may deny this credit.
8. You may be at a higher risk for identity theft
When people hear the words identity theft, they often think about someone using their information to take out loans or credit cards in their name. However, someone can also use your personal information to fraudulently prepare, and subsequently collect your tax refund. If you did not file your income tax return and the IRS unknowingly receives a fraudulently filed tax return, it will likely process the fraudulent tax return believing that it was filed by you. This may result in an assessment and collection action. If all your tax returns are filed, the IRS will investigate the filing of a second (possibly fraudulent) tax return.
9. You may reduce your future Social Security benefits
Generally, you are required to pay Social Security taxes as you earn income. The hope is that, later in life, you will be entitled to receive Social Security benefits. The amount of your future Social Security benefits that you may be entitled to receive is based, in part, upon the average of your income. If you are self-employed and do not file a tax return within a specific time after the tax return was due, the Social Security Administration will not include your income for the year at issue in determining your future Social Security benefits.
10. Another individual may claim your child (or qualifying relative) as a dependent
There are requirements to claim another person as a dependent and it is possible that more than one person is eligible to claim another as a dependent. If you file your income tax return listing a dependent who has already been claimed for that year by another, the IRS may reject your return or disallow the claimed dependent. You may or may not have the opportunity to persuade the IRS in allowing you to claim the dependent instead.
11. You may lose out on other opportunities
If you are trying to obtain financing, it is possible that the lender will ask you to provide copies of your most recent tax returns or to allow it to obtain tax records directly from the IRS. If you have un-filed tax returns, you may be unable to obtain financing even if you are able to prove that you are currently receiving a substantial income.