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UNFILED INCOME TAX RETURNS
Do you have a tax problem? If you do, you have an upset in your stomach, a feeling of despair. You not only feel fear, you feel guilt. You are not paying your taxes. Your waitress at IHOP, your clerk at Wal-Mart are paying their taxes, although they may be making a lot less money than you. They are meeting their responsibilities, and you are not. It’s time to get right with IRS. Getting right will help your digestion, your disposition and probably your love life.
Tax problems come is several varieties. Two of the most common are Failure to File Income Tax Returns, and Failure to Pay Income Tax Due.
FAILURE TO FILE INCOME TAX RETURNS
A surprisingly common problem is Failure to File Income Tax Returns. Many people work for wages, have taxes deducted, and have a report sent to them at the end of the year of their earnings. Their tax returns should be simple and easy. Sometimes a personal problem or procrastination interferes with completing a return. Sometimes one year has an unusual or complicated problem that overwhelms the taxpayer. Sometimes the tax complexity grows to become insurmountable as one’s life becomes more complicated. The job of preparing a tax return may seem overwhelming. Then if one misses filing for a year, the questions and complexities grow. Should I file year 2 when I haven’t yet filed year 1? Do I still have all of the information I need to file those old returns? Sometimes the same question affects returns year after year. Sometimes the tax preparation job is complex from the start. Self-employed people have to keep track of their income and their expenses which may require a bookkeeping system and training in how to use it. Self-employed people also find the complexity and the tax bill grows from year to year once they miss a filing deadline.
WHAT STAGE IS YOUR DELINQUENCY?
I’M ONLY A LITTLE BEHIND…
If you have missed a filing deadline, or have not filed one or more tax returns, if you have not yet begun to receive mail from IRS, or if you have begun to receive IRS mail, and the mail is relatively friendly, asking whether or not you have filed your returns, you are in a position to keep your failure to file a minor problem. Put your mind to it, and file the delinquent income taxreturns. Your penalties will be financial and probably minor.
If you’ve lost your records, remember that the Internal Revenue Service receives its copies of all of those reports from the people who pay you money. IRS already has a file for you for each year that you earned income. IRS will share its information with you. Just call and request it.
IRS IS HOUNDING ME…
If you have failed to file tax returns for several years, or if you intentionally didn’t file one year when you had a large tax due, IRS considers your account a serious income tax delinquency.
If IRS has sufficient information, it may have already created an income tax return for you for one or more of the years you have not filed. If so, it has probably sent you a copy of that proposed return. IRS’s “Substitute for Return” is prepared from the information submitted to IRS by the people who have paid you money. IRS does not have information about deductions you may be entitled to, either business deductions such as the cost of merchandise you sold, or personal deductions like contributions IRS doesn’t know if you are married or have dependents you are entitled to claim to reduce your tax. If IRS has prepared a tax return for you, it will often be to your benefit to correct that tax return to claim the benefit of the deductions and exemptions to which you are entitled.
IRS does not wish to over-tax you in any year, not even in the years you have not filed returns. You may still file a correct return, which will replace the substitute created by IRS. IRS will then work from the corrected tax liability, rather than from its estimate. While IRS does not want to collect tax in excess of what it has coming, there are financial penalties for not filing returns which IRS will enforce. The penalty for not filing returns is generally 5% of the unpaid tax each month, until the penalty reaches 25%. There is a separate penalty for not paying your tax when it is due. That penalty is one-half of one percent of the tax due, until that penalty reaches 25%.
TAX LIEN AND TAX LEVY…
IRS’s creation of a substitute for return gives IRS an estimate of the amount you owe in tax. The substitute for return, or your filing of a tax return without payment, is often followed by collection action by IRS. That collection action is often the filing of a tax lien or tax levy.
A tax lien is a filing with an appropriate bureau of records, such as a Register of Deeds, that you owe taxes. In order for anyone to buy property from you and to receive a “clear title” the buyer must assure that your taxes get paid from the sale. While it may affect your credit rating, a tax lien does not immediately forfeit your property to IRS. A tax levy, on the other hand, is a demand sent to people who owe you money, such as your bank or employer, demanding that the amounts due you, up to the amount of your tax bill, be paid to IRS. The person who owes you must them pay what is owed to you directly to IRS where it is applied to your account.
What should you do if you are behind in your tax filing responsibility? Get caught up! How should you do it? Get started! Get started however you can. Start the job. You may be a procrastinator. Just get started. Don’t wait to decide how to approach the problem. File year 2 first, if that is easiest, then go back to take care of year 1. If you have to dig up records, file one year at a time. Call IRS and have it send you its information about your income. If the records are all available, file all delinquent tax returns at once. The important thing is to get started. Your problem is growing by the month.
People who are behind on their taxes are often self-employed, not having the benefit of receiving a W-2 Form at the end of the year, showing their earnings for the year and the taxes withheld. If you are self-employed, you are probably responsible for Self-Employment Tax (Social Security Tax for the Self-Employed) as well as for income tax. Self-Employment Tax is imposed at the rate of 15.3% of your business income (after deducting business expenses). Your average income tax rate, unless you are poverty stricken, is at least 10%, so your tax bill is likely to be 25% or more of your income. Penalties for non-filing and non-paying go up to over 25% of the tax within 6 months, and keep rising until they reach 50% of the tax. The total you owe for any year with penalty is about 35% or more of the year’s income, plus interest, for each year you are behind. If you have not filed for three years, you owe the tax man about a year’s income. The quicker you start working on that the better it will be for you.