Five on Fridays: 5 Reasons to Always File Your Tax Returns on Time!

Below are five reasons why you should always file your tax returns on time, even if you cannot afford to pay what you owe to the IRS:

1) If you don’t file your tax returns on time, when you do file, you will incur a civil penalty for late filing equal to up to 25% of any balance owed, plus interest.

2) By not filing, there is no statute of limitations on the amount of time the IRS has to come back and say you owe more in tax or penalties. Typically, the IRS has three years from the due date of a return to assess any additional tax or penalties. But if you don’t file, the IRS could conceivably go back 20+ years and say you owe them money, even though you have no records left to prove otherwise. Start the clock by filing!

3) If you don’t file a tax return, the IRS can prepare what’s called a “substitute for return” using information from third party reporting (i.e. W-2s, 1099s) to determine your tax liability. So let’s say you received a 1099-MISC for self-employment income, but had expenses/deductions that would have reduced your taxable income. In preparing the SFR, the IRS does not have to credit you with any expenses and/deductions when determining your tax bill, so you could end up with a tax bill for far more than what you actually owe. By not filing, you may also be foregoing the opportunity to receive a refund, as you only have a limited time from the date the return is due (3 years) or the tax is paid (2 years) to claim a refund.

4) If you don’t file tax returns, your tax liabilities are probably not dischargeable in bankruptcy. If you timely file your returns, any IRS debts arising more than three years before your bankruptcy petition filing date are typically discharged. If you haven’t filed, or the IRS has prepared an SFR for you, most courts will not discharge your tax debt for those years, even if more than three years old.

5) Not filing your tax return may result in you going to prison! Not filing alone, if you meet the minimum income thresholds (depending on your age and filing status), is a misdemeanor under the Internal Revenue Code punishable by up to 1 year in prison. If your failure to file is “willful,” you could be looking at a felony, punishable by up to 5 years in prison.

So remember, it’s always a good idea to file your tax returns, even if you cannot afford to pay what the return says you owe. You can always seek an installment agreement or an offer-in-compromise if you can’t afford to pay your tax debt. Not filing at all is never a good decision.

Disclaimer: This article does not constitute legal advice. Each person’s tax situation is different and you should consult with your own CPA or tax attorney regarding your situation.