by Dave Horwedel
I have heard many taxpayers or potential taxpayers say something like “I don’t want to raise any red flags by filing my late taxes” or “I want to stay under the radar”. With a healthy fear of the IRS and the inability to pay their tax debt, this seems to many to be the only solution. A variant of this is “Why file my taxes if I can’t pay them?”
This is an understandable concern. Who wants to receive letters and notices from the IRS! You certainly don’t want to give them access to all of your bank accounts and financial data and send them a notice “I have not filed taxes for ten years.”
This is all fine. But what is the BIGGEST red flag to the IRS? NOT FILING YOUR TAXES. The IRS knows you exist. You have a Social Security Number. They have access to it. They know you did not file a tax return. If you earned wages your employer sent a W-2 to the IRS. If you were an independent contractor, your customers reported paying you to the IRS. If you earned interest, your bank reported this to the IRS. If you earned dividends or profited on stock sales, your brokerage house reported this to the IRS. If you sold a house, this was reported to the IRS. Even if you made no reported income, they may still catch you out. You own a car or a house or are making payments on one. They can find this out and ask where did this money come from. They may even estimate your income based on your mortgage payment!
Yes, it is true that you might seem to get away for it for a while. But you gain nothing. All the time you are “getting away with it”, the IRS is waiting and the bill is growing. The IRS never goes away. They may be slow. They may be stupid. But they are always there. If you can go an entire lifetime without paying, great. You did it! Of course, if you have an estate, they may still get their fingers in. But if you do not make it through your entire lifetime, being under the radar for some years gains you nothing.
When you finally have to file, you will have to pay the penalties and interest for not filing and paying. And the kicker is the original penalties for not filing are 10X those for not paying!
Plus, on late filings, the rules favor the IRS. If you owe IRS money on un-filed taxes, there is no statute of limitations. If you owe them $10,000 on a return you have not filed from say 2010, you will pay that with penalties and interest if they catch up with you and you file in 2015. And suppose they owe you $15,000 refund in 2011, and you also file it in 2015. Sorry, too late. No refund for you. But the 2010 debt, penalty and interest is on your 2015 tax bill.
To file or not to file?
The answer is to file. There really is no benefit in not filing. But how to best do it?
It is important that it is done right. You are doing a late return and any penalty and interest are based on what is owed. So your best bet is to hire an Enrolled Agent and back him up with any data he asks for. If he asks you for your business mileage for 2010, get it for him. 10,000 business miles might give you a tax deduction of $5,000!
If you paid tuition in a past year, that may be a $2500 credit. Enrolled Agents, such as those at Torchlight Tax, hold the highest federal tax credential. We know the law and will look out for your best interests. So when we ask you a question, listen closely and do not automatically say “Who knows? It was too long ago.” Cooperate with us in finding every tax break.
It takes expert knowledge, hard work, and data to get you every legal tax break. We have the expert knowledge and do the hard work. You will have to help us get the data we need.
If you do decide to go it alone, OK. That is your right. You are still welcome to contact us for a free consultation. We will do it by email, phone, or in-person. We will be glad to help, but we won’t do your whole return for free. If you try it alone and wind up with a large tax bill, you may wish to re-consider. Usually the cost of EA tax preparation is a small percentage of the total tax bill. Also, consider why the return was not filed on time in the first place? Was it because you were confused or did not know what to do? If so, this would be another reason to use an EA.
Now for returns six months past the due date, there is no electronic filing. So you will need file your return by sending a paper copy to the same location you would file your regular return. This data is on the tax form itself. If you have received a notice from the IRS, make sure you send your return to the location directed in the IRS notice.
Using an EA
Another advantage of using an Enrolled Agent is he may be able to assist you in getting an abatement in penalties. This is likely to be approved for one year, not for more than one. This can be a big savings if the year has accrued substantial penalties and interest. The rules about abatement are somewhat complex. Very often you will see an IRS representative who will ask you a bunch of questions, type the answers into his computer and get a computer-generated answer back that you are not eligible for an abatement of penalty and why, but the computer also says you can appeal it. Usually the appeal is approved. Sounds crazy. Well, I never said tax rules were sane. The well-trained EA sits through the expected question and answer period, is told the abatement is disapproved which he expected, files his appeal and gets the abatement.
If you cannot pay what you owe, you can request an additional 60-120 days to pay your account in full. You can also request an installment agreement which will likely allow you to pay it off over five years. There is a fee for this and you have to pay interest as well. But if you get this approved and keep your agreement, this protects you from tax levies and garnished wages. You also may be eligible for an Offer In Compromise. Maybe the IRS will accept less than full payment. If you go this route, make sure you check when your debt was assessed. The IRS has a statute of limitations requiring them to collect within ten years of assessment, but this is extended while an Offer in Compromise is under consideration. So if your bill is about to disappear through the statute of limitations, do not enter into an Offer In Compromise. Also, some tax bills are deemed un-collectible if you have no assets the IRS can levy and your income is below a certain level. The level is variable based on the cost of living where you live but you can look it up on the Internet or your Enrolled Agent will find out.