Back Taxes - Unfiled Returns Versus Filing Taxes
Posted by Dean Alexander on Thu, Nov 19, 2009
We all know that with filing our taxes we will have to pay if we fall short on the payment of tax liability. In our minds it is usually a negative experience. Many people delay filing their taxes because they know they will have tax debt to IRS, ultimately incurring back taxes.
But the question is: Is this the smartest move? I would argue it is not.
Let us look at the advantages and disadvantages of filing late returns versus not filing taxes at all.
Let us see if there are any advantages of filing returns in time.
1. The intuitive thing is that you are complying with the law and avoiding negative consequences that can be serious, like being accused of fraud. So in that sense, filing may only bring one thing, peace of mind. To many, that may be enough.
2. Sometimes people have unfiled returns so as not to owe taxes but they did not get around to doing it as time goes by. The greatest harm is when they are due a refund that they will not be able to collect because they are barred by the refund statute of limitation. I have seen people lose thousands of dollars in one year because they neglected to file. Ask yourself this:
How long does it take to collect the information and prepare the tax return. Eight hours?
Is working eight hours worth losing three, four and even as much as five thousand dollars?!?!
How many times can you make five thousand dollars in one day? It is a crime not to file if you're entitled to a refund. Always remember that you will make two or three thousand dollars in the few hours that it will take to prepare the return if that is the amount of refund you will get.
3. Protecting the collection statute of limitation. If you filed the tax return and the IRS did not audit you, they can no longer audit your return after three years. Also, if you filed and you owe taxes $10,000 or even $100,000 and for some reason the IRS could not collect the tax debt, then you may have just avoided paying a tax owed to Uncle Sam.
4. Sometimes your CPA, your tax attorney or tax professional will be racing against time to file the unfilled tax returns in order to negotiate an agreement such as Installment Agreement, Uncollectible Status, and Offer in Compromise or remove a tax levy or garnishment that is crucial to remove quickly. Had the filing been done previously, the thrust of the effort now on the negotiation. By not filing the returns, sometimes you may have to wait more than three months before the IRS posts those late returns.
5. IRS employees may be more lenient when you negotiate if all taxes are filed.
6. Finally, If you don't file, the IRS may file taxes on your behalf. They call them substitute for returns or SFR. You are always worse off, when IRS prepares your taxes. For example, if you sold carpet for $100,000 and they discover that, your income in their books is $100,000 never mind that you paid $80,000 to buy the carpet. They are not going to volunteer to acknowledge your expenses. The hammer is falling and falling hard. Claim your deduction, Mr. (or Mrs. to be politically correct)
Now, let us look at the benefit of not filing the tax returns.
The one obvious benefit is that you don't hear from them as long as they don't discover you. For how long do you have to hide from them? Forever!!
Remember what we said when you file? Do you remember that we said you only have to hide 10 years?
Let us see what are they going to do if filed the tax returns and what also let us take a look at what they will do if you don't file and you don't have money in either case. Has anyone told you about the blood from the turnip?
If you don't have it, you simply don't have it. More over they may willing even to forgive the debt if prepared properly if you had filed the return.
But if you don't file, have money or not have it, they may send you to the slammer. This is just an example.
File. Would you? There is a solution for everyone.