Late Tax Returns – Some Reasons Why Arizona Taxpayers Should File

    Millions of Americans fail to file tax returns each year for various reasons. The most common reason we see is simply procrastination combined with a dash of fear. Of course, some don’t file on purpose.

    Every “non-filer” worries about what the potential consequences will be for failure to file.  Some think about it every day of their lives.

    For those, we try to bring some clarity in the form of information. That clarity begins with understanding what the potential negative consequences can be. Here are a few:

    1. Lost Refunds In order to receive a refund, the return must be filed within three years of the due date. Yes…they will keep it no matter how large it is, and yes it is often a very large windfall for the government.

    2. Lost Earned Income Credit Three year rule again. Failure to file within that time period means that it will be lost.

    3. Lost Social Security Benefits If you are self employed, you have to file returns reporting self employment income within three years of the due date in order to receive social security credits toward retirement.

    4. Increased Debt Penalties for failure to file and failure to pay on time add up and interest grows on those penalties and the underlying debt. These additions often double the debt by the time the returns are filed.

    5. Increased Scrutiny Late returns are more closely examined.

    6. Substitute Tax Returns Income is typically reported to the IRS both from employers and from others. So, even if you are self employed, the IRS probably has information about how much your “clients” paid you in a given year. At some point, they will use that information to create a tax return for you. It won’t be correct, as it won’t contain correct deductions. It can be used to assess a debt and begin the collection process however. The assessment of the tax based on a substitute return can also create other serious problems related to future tax debt options like bankruptcy.

    7. Prosecution The IRS is starting to catch up to the computer age. It can now more easily figure out who isn’t filing. As a result it has ramped up it’s pursuit. It can charge non-filers with a crime. The willful failure to file is a misdemeanor and can result in a sentence of up to one year in prison for each tax year not filed. If the IRS discovers an habitual non-filer they can refer the case to the Criminal Investigation Division to determine whether prosecution is warranted.

    Some good news now…

    Most people with unfiled returns will avoid criminal prosecution for three reasons.

    1. Numbers

    It is difficult for the IRS to get to everyone right now. There are just too many non-filers and too few employees in relation; kind of like a “Krispy Kreme” grand opening.  They will get their “dozen glazed” eventually though.

    2. The Voluntary Compliance Program

    If the non-filer attempts to come forward before an IRS investigation or examination ensues, he or she will usually avoid prosecution related to the failure to file the returns. This voluntary compliance program applies to the non filer who does the following:

    • Earned income from legal sources
    • Files a correct tax return or at least cooperates with the IRS in determining the correct liability
    • Voluntarily informs the IRS of the failure to file
    • Makes the disclosure before being informed under criminal investigation
    • Makes full payment of amount owing or arranges an alternate solution

    3. IRS can’t prosecute after six years

    The IRS is barred from prosecuting the failure to file a tax return if the return that was due to be filed more than 6 years ago.

    4. The substitute return can be “challenged”

    The substitute return can be challenged via the audit reconsideration process. This means that even though the IRS has filed the return with incorrect and often too-high debt, it will consider correctly filed returns and replace the substitute return with correct numbers in most cases.  Whether it makes sense to use this process to deal with the debt, depends on the individual circumstances of the case.

    We have helped many non-filers deal with unfiled returns and in many cases the debt is substantially reduced simply by filing the correct return and asking for a reconsideration of the substitute returns. In others, there is a solution. The key is to make the decision to deal with the problem before it becomes any larger.

    Also, if bankruptcy is a possibility, be sure to speak to an attorney knowledgeable about the interplay between tax and bankruptcy before filing the returns.  If you haven’t filed for several years, speak to an attorney before talking to a CPA or tax preparer,  in order to maintain attorney client privilege.