People fail to file taxes for many reasons, chief among them a lack of ability to pay in full. Often, this leads to spiraling debt as penalties and interest mount. Many delinquent taxpayers fear the IRS will show up at their home or business and demand an exorbitant amount of money.
There are many reasons why you should avoid filing your taxes late.
Luckily, the IRS only sends agents into the field to confront taxpayers who owe hundreds of thousand of dollars, so if you owe back taxes, you are unlikely to be targeted for that type of enforcement. However, in time, a letter from the IRS is bound to arrive in the mail and notify you that the IRS has calculated your tax debt and is demanding payment.
This is the worst-case scenario because when you fail to file a tax return, the IRS calculates taxes without essential deductions and with maximum penalties. To chew these enormous tax bills down to size, taxpayers must file a return. The best way to handle past due returns is to file them right away and began making payments on an IRS approved installment plan. This keeps the IRS off your back. If you are still on the fence about proactively filing your returns, consider these 5 reasons that you should get those returns filed now.
Avoid Interest and Penalties
The IRS is famous for charging harsh penalties for a reason. Late payments result in a 5% per month penalty up to 25% plus interest. If you also fail to file the return, this penalty is effectively doubled. Filing returns on time halves the penalties even if you can’t pay. Entering into an installment agreement can help reduce penalties and interest even more.
Claim a Refund
What if you are due a refund? You must file to get it. Once three years passes from the filing due date, your return is forfeit. Also, you lose tax credits, such as the Earned Income Credit. In addition, if you have past due returns, the IRS can withhold any current tax returns, possibly digging you into a deeper financial hole.
Protect Social Security Benefits
This applies to the self-employed. If a return remains unfiled, the Social Security Administration cannot credit that year’s income toward Social Security retirement or disability benefits. Filing the return restores these credits.
Avoid Issues Obtaining Loans
Approval for many loans, such as home purchases or refinances, require copies of past tax returns. This also applies to federal aid for education and other benefits.
If you need a longer time to pay, an installment agreement may help. Also, some taxpayers qualify for an offer in compromise, which reduces the amount owed.
Prevent a Substitute Return
When taxpayers fail to file, the IRS must use a substitute return to assess taxes owed. A substitute return only applies minimum deductions. This often results in an inflated tax bill and even higher penalties and interest. After filing a substitute return, the IRS sends you a 90-day letter, which gives you 90 days to file your own return and apply any missing deductions. After 90 days, the IRS begins collections based on its internal assessment.
Collection action can result in wage garnishment, levies on bank accounts and property seizures. Once a substitute return is filed and a 90-day letter sent, the only way to reduce the tax liability and stave off collection activity is to file a return and make payment arrangements with the IRS.
What if You Owe More Than You Can Pay?
This is no reason to delay filing a return. The IRS allows taxpayers to request an additional 60-120 days to pay in full through an online payment agreement. You can also obtain an extension by calling 800-829-1040. There is no fee for this service.
The thought of suffering through IRS collection activity keeps many delinquent taxpayers up at night. There is no reason to suffer this anxiety. Filing a past due return is the first step toward getting off the IRS’s collection list.
Once the return is filed, delinquent taxpayers become eligible for installment programs and options for payment forbearance due to hardship. In many cases, the IRS will accept an offer in compromise, where much of the tax, penalties and interest can be reduced. If you have unfiled tax returns from the past, it makes no sense to continue delaying the filing. Once the tax return is filed, options to settle the debt become available.
Tax Avenger Canton is an experienced CPA and Tax Preparation Firm that specializes in tax problem resolution. Dealing with the IRS is challenging and complicated. Taxpayers may or may not understand the full situation they might have gotten into and how to resolve it.
Regardless of your situation we are here to help you resolve your tax problems, clear your name, and put together a tax plan for you to ensure that you will not have any future problems with the IRS. We offer a full complement of services from accounting services to business startup, Individual, financial and tax consulting, tax resolution and so much more. Call today for a Free Consultation!