- Learn the consequences of not filing your tax returns for multiple years.
- Find a 4-step action plan to get back on track with your taxes.
Few people actually enjoy the process of filing taxes. Having said that, you have no choice. Filing tax returns is absolutely something that you're supposed to do like clockwork every single year.
Of course, there is a myriad of different reasons why you may have fallen behind. You could be going through something of a major life transition and simply were unable to meet the filing deadline. Maybe you filed for a much-needed extension and then other things got in the way (as they often do), causing you to fall behind even further.
Regardless of the reason, it's important to take meaningful steps to get yourself back on track before it's too late. Thankfully, this isn't necessarily a difficult process. However, it will require you to keep a number of important things in mind along the way.
The Consequences of Not Filing Your Tax Returns for Multiple Years
But first, you must understand the actual consequences of what can happen if you don't file your taxes for multiple years in a row – or even for ten years or more in some situations.
The most immediate impact you're likely to experience will come by way of the IRS itself. If you have income that you haven't reported on your taxes, you will be charged various penalties and fees on everything that you should have been paying up until now. These can and often do quickly add up to significant sums of money.
Also important to keep in mind is if you are due a refund from withholding income tax, you generally have 3 years from the due date of the return to file for a refund. Fail to file in time, you give up your refund. This is why it is always important to get on track as soon as you're able to.
Keep in mind that the IRS will charge you those fees and penalties on all taxable income. They do not take into consideration any credits or deductions you would have enjoyed had you filed taxes on time. They don't have records pertaining to expenses like your rent or other things that you need for your job like essential equipment. Because of this, the IRS will assess any fees based on what they think you owe. These fees may not accurately reflect what you actually owe.
If they determine you have been "willfully" failing to file taxes, your punishment could include up to five years in prison. Likewise, you could get hit with a fine of up to $250,000 if your situation is considered to be tax evasion. Needless to say, these are all consequences you should avoid at all costs.
Other Consequences for Not Filing Tax Returns
There are other consequences involved with not filing your taxes for a lengthy period of time, too. Sometimes when you file for a passport, you have to show your recent tax returns as a form of income verification. Obviously, you can't do that if you haven't been filing them. The same is true if you were planning on applying for a mortgage or car loan.
If retirement is coming up, it could also impact the types of benefits that you will receive like Social Security and Medicare. All of these are crucial aspects of life that you do not want to jeopardize. So, you should get your taxes taken care of sooner rather than later.
Getting on Track With Your Taxes: A Plan of Action
The first thing you should do to get back on track with your taxes involves checking on the current status of your account with the IRS. At the very least, this will give you an indication of what the IRS thinks you owe. You can do so at the official website via irs.gov, or by calling 1-800-829-1040 to speak to a live representative.
At that point, you have two options available to you. The first involves paying what the IRS currently says you owe along with both the original taxes and any fees or penalties that have accrued, to settle your account. If you can't pay the full balance in one lump sum, you can attempt to get on a payment plan.
The second involves gathering all the financial information you need to complete the tax forms you did not file. You'll need to compile several important documents, including but not limited to things like:
- Any information pertaining to the income you made during the missing years, along with any expenses that you had so that you can claim deductions and credits that apply to you.
- Any supporting documentation like receipts and income statements that are necessary to complete the aforementioned financial records. This may require you to perform some forensic accounting so that you have the most complete picture to work from.
At that point, the next step is clear: you should file your missing tax returns at your earliest convenience. Or inconvenience. The faster you get things straight with IRS (and any state you may owe), the lower the total penalties and interest will be. So in this case, the sooner you do it, the better.
Oftentimes, this is absolutely the way to go. Once all documents and other financial information have been properly recorded, you'll likely end up owing less than the IRS thinks you do. You'll still owe money, but you'll save a bit in the long run.
Finally, you should pay your taxes as soon as you can. Again, you can do this either through a lump sum or get on some type of payment plan to bring your account up-to-date. You may also choose to look into a settlement agreement or any type of income tax forgiveness that may apply to you. You could even choose to make what we call an offer in compromise. This allows you to pay something towards your balance to consider everything settled. The IRS would have to agree with whatever offer you make, of course.
At that point, you should prepare for future taxes so that you don't find yourself in the same position down the road. Need help doing precisely that? Have any additional questions about this process that you'd like answered? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.