The IRS Will Catch Up to You
There are plenty of reasons why people don’t file a tax return, but none of them are well advised. If you are a non-filer and you have been receiving letters from the Internal Revenue Service, then ignoring them is only going to make matters worse. Even though it is intimidating to respond to the IRS, your best answer is to seek professional help and take action. Here’s why.
The IRS Response
If you have failed to file an income tax return, the IRS will take certain actions – most notably, they will file a substitute return on your behalf, and you can count on that return being anything but tax advantaged. With no paperwork filed by you, the agency has no choice but to base the return on what they have – the income information that has been provided by others, including employers, banks, casinos, businesses and more. They won’t give you the benefit of any exemptions and they won’t investigate whether you are entitled to take any deductions.
If you’re married they won’t even categorize you as married filing jointly – they will automatically put you in the married filing separate status, which generally works against most people. Adding insult to injury, after they’ve prepared the substitute return you’re likely to receive what is commonly known as a 90-day letter: this is their official notice of statutory deficiency, which gives you 90 days to file an appeal with the Tax Court – and that’s when things can really start to get expensive.
The Costs of Not Filing
If you get to the point where you’ve received a 90-day letter, it is time to hire a tax professional to file an appeal on your behalf. Choosing not to respond to the letter is always an option, but a costly one, as it makes the substitute return information official, and allows the agency to start issuing liens and levies against your assets, your income, and more. Your credit rating will be impacted, and you’ll quickly find that the remedies that were once available to you have become even more expensive to avail yourself of.
Why Don’t You File?
Maybe you think that your income is so low that you fall below the filing threshold and don’t owe the government any money. Maybe you know that you owe money and are afraid that you won’t be able to pay. The truth is that in both cases, you’re probably making your situation more difficult than it needs to be. Those who think they don’t need to file may be cheating themselves of refunds that they are owed, including child tax credits, excess withholding, earned income tax credits, and even tuition credits.
As for those who fear the impact of filing, by not doing so you actually make matters worse. Not filing doesn’t mean that the IRS doesn’t know about your income – it just means that they’re liable to impose a 5%-per-month failure-to-file penalty, interest, and more. On top of that, you’re missing out on a number of compromises that the IRS is able to offer to those who are in hardship situations, including payment options.
What the IRS Knows, Whether You File or Not
The Internal Revenue Service’s operations are not dependent upon the information provided by taxpayers. There are plenty of other sources available to them to give them a pretty good idea of how much money you make each year. Here’s a rundown of just a few of the resources that get sent to them each year, and which are automatically associated with you and your Social Security Number:
- Your employer(s) send in your W-2, which contains all of your wage information
- Any businesses you have contracted with send in 1099-MISC forms with information about monies you’ve been paid
- Any gambling winnings from casinos, poker parlors, racetracks, etc. get sent to them on form W-2G
- Any financial accounts that you own will send the government forms 1099-INT and 1099-DIV, detailing interest and dividends that you’ve earned
- Any financial institution that you’ve worked with to sell securities will send them form 1099-B showing the gross proceeds of the sales
- If you own a business and have processed credit card transactions, they will receive records of those sales on form 1099-K
- Any businesses or trusts with whom you are associated will send form K-1
- Any real estate that you sell will be reported to them via form 1099-S
- Any financial institution that you’ve worked with on large transactions will provide the details on Form 8300
- And much more
Needless to say, the information represented on these various forms provides the IRS with a wealth of data from which to prepare the previously mentioned substitute return – all without the benefit of any deductions that you may have been able to itemize, exemptions for which you qualify, or credits that you are owed. Even assets that you’ve sold won’t get the benefit of being adjusted for cost basis. And don’t forget that higher married-filing-separate rate that you’ll be subjected to if you’re married.
Help is Available
If you are a non-filer and you are facing a scenario like what we’ve described here, there’s a way to put the brakes on the situation – and the sooner you ask for help, the less expensive things will be. The professionals at our office are fully equipped to get your tax situation in order and minimize the impact of substitute returns and IRS levies. We can request transcripts from the IRS if you’ve lost or misplaced previous returns and records, get transcripts of information that’s been reported by others, and put together a strategy designed to minimize and address all of your problems.
No matter how bad the situation feels, failure to respond will only make it worse, while putting the situation into the hands of professionals may enable you to get penalties waived and take control of your life back. So gather up all of those IRS notices, and as much of your financial information as you can - and give us a call. No matter how hopeless the situation feels – and even if you’ve lost all of your records - we can help.
Are you behind on filing your taxes? Please call this office at 888-842-1366 for further guidance on your situation.