TAX TIP TUESDAY
Why You Should Always File Your Tax Return
It’s easy to put off filing your taxes. Maybe you’ve put it off for several years and see no point in starting now. It’s likely either you or someone you know has gone years without filing, and nothing happened; or maybe your missed filing is a constant dark cloud that revisits you this time every year. Whatever the case may be here are a few reasons why you should ditch the idea of not filing and get caught up with filing your tax returns instead.
Start the clock…
Few people are familiar with how far back the IRS may look when it comes to your past tax returns. Typically, the IRS follows a 3 year statute that allows them to audit or demand payment on your income tax filings. The 3 year clock starts with either the due date of your return (April 15th) or the date you actually filed your return, whichever is later. For example, if you filed your 2015 personal income tax return on April 15th, 2016, then the 3 year statute expires this April 15th, 2019. The IRS is notorious for waiting until the final hour and allowing penalties and interest to accumulate before issuing a notice or audit simply because the law allows it.
That’s not all! The clock may not actually start until you file a return. If you decide not to file a tax return the IRS has until the end of eternity to come after you. You may be asked to make a payment on a tax year that is so far back neither you or the IRS has good records on the actual liability. Unfortunately, at that point with no documents to support an alternative calculation, it is your word against theirs.
The IRS may be slow, but they’re still well informed…
Each year your employer, your bank, and even the companies you do business with, report your information to the IRS (think 1099s). Whether you file a tax return or not. The IRS knows how much you made and who you made it with (Scary right).
While it takes the IRS time to match up your tax return to the reported amounts, they eventually get it done. Matching is actually one of the top IRS red flags that results in an audit of your return.
The longer you wait, the worse it gets…
If you do nothing else this filing season, file an extension! The penalty for simply not filing your return by the due date results in a failure to file penalty. For individual and corporate returns, the penalty is 5% of the unpaid tax that would have been reported on the return. Although partnerships and s-corporations do not pay tax, penalties are still imposed on a per partner or shareholder basis.
Also consider this, if you anticipate owing with your return and you’re not be able to pay by the due date you should still file to plan ahead. The payment is not due until April 15th, and filing sooner will allow you time to request an installment agreement and reduce the amount of interest due on the outstanding balance. By the way, the IRS increased the interest rate on unpaid taxes up to 6% effective 1/1/2019 (5% for corporations).
Don’t owe, then get your refund…
That 3 year clock that the IRS has is the same clock you have to claim a refund. If you miss the deadline to claim your refund there is nothing you can do to get that money back. To illustrate how this might happen, here’s an example:
The IRS issues a notice of tax due for a return from 4 years ago. However it is incorrect, simply because they are looking at the income you earned but are not aware of the all the deduction you could take. So you recreate the return to show the income along with the deduction you are allowed and voila you actually have a refund. Unfortunately, the clock has ran out and you no longer can make a claim to that refund.
Also consider, that with the most recent government shutdown and many IRS employees presently on hardship leave, the IRS is facing serious backlogs. Refund delays are anticipated so you should consider filing sooner rather than later to claim your refund this year.