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Okay, you procrastinated a bit and didn’t file a few years’ tax returns. Shame on you! What should you do?
First if you fail to file tax returns, IRS will eventually prepare a return for you. Guess what: the return that they prepare will usually result in a lot more taxes owed than if you filed your own return. Secondly, you could go to jail for not filing your return. Finally, they will hit you with huge penalties if you owe taxes for bot non payment of taxes and for non filing. It is roughly 5% per month for late payment and 5% per month for late filing up to 5 months. This is in addition to other penalties and interest.
Sandy’s elaboration: IRS rarely throws people in jail for non filing. unless it is an extreme case. Let’s face it: they would rather get their money plus penalties and interest.
Even worse,there is no statute of limitation for non filed returns. You have a noose around your neck forever as long as the return hasn’t been filed. Yes, IRS can go back forever.
Example: John procrastinator didn’t file their 1987 tax return. IRS can go back and file for him that 1987 return and/or audit that return for that year.
So what do you do in order to avoid all this?
First, IRS will deem that you are reasonably compliant if you file your last six years’ tax returns. Secondly, if you file first before IRS catches you and sends you a notice, you ordinarily won’t go to jail. Finally, filing your own return will almost always result in less taxes owed.
Note: If you file delinquent returns, you may owe taxes plus interest and penalties. However, if you file returns that are three or more years late after their due date, you can not get a refund! Thus, if there are any possibility of refunds, you must file within a three year period from the date that the return is due.
Many people are afraid to file late returns because they don’t have the money. However, filing anyway will reduce the penalties and result in no jail time even if you don’t make a payment. If you don’t have the money, IRS might accept installment payments or might be willing to accept less than you owe under their enhanced “Offer and Compromise ” rules. If you have few assets and not enough income to pay them off over time, they may be willing to accept much less than what you owe. Using a tax professional would be crucial to obtaining this favorable treatment.
Bottom line: always file your returns on time even if you don’t have the cash to pay the taxes. If you don’t have the cash, seek help from a tax professional about potential solutions to this dilemma. Trust me, you won’t look good in prison orange and/or won’t like the large penalties that will occur due to non filing.
Material derived from my book, “Lower Your Taxes: Big Time“
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