About Unfiled Tax Returns
Our income tax system is a self-assessment system. This means that the government relies on you as a taxpayer to identify and compute your tax liabilities and to self-assess your own taxes by reporting this information to the IRS. Not only does the IRS expect you to do this accurately, it also expects you to do so timely.
Tax returns have due dates. Many of these dates can be extended by filing a simple application, such as the Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. The filing date can also be extended if you were out of the country, were unable to manage your finances, etc. These exceptions should be considered if you have unfiled tax returns.
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It should also be noted that there are rules for determining when an unfiled tax return is received. WIth these rules, not all late-filed tax returns are actually late. To be late, the return has to be mailed late. It does not matter when the IRS actually received the tax return. This concept is found in the timely mailing rule. This rule generally says that the tax return is timely if it is mailed to the IRS timely, even if the IRS does not receive the tax return timely. This rule applies to the original and extended due dates.
Substitute for Returns or SFRs
If your tax return truly is filed late or has never been filed, there is some chance the IRS may prepare a substitute tax return or SFRs for you, A substitute for return is a tax form that computes your tax liability. Think of it as an IRS-prepared and filed tax return.
You may be thinking, "great, so the IRS will file my returns for me--why should I bother filing my own tax returns?" The answer is that IRS-prepared SFR's will typically omit favorable tax deductions, credits, etc. This often results in tax assessments that are higher than they would be if you had filed the returns yourself.
Excess collections is another issue that has to be considered. Excess collections refers to funds on account with the Federal government that are not applied to a specific taxpayer account. Think of this as the general fund where movies are not identified as coming from any particular source.
With Federal taxes, excess collections usually come up when a taxpayer pays the IRS via wage withholdings and then fails to timely file their tax return. If enough time goes by, generally three years from the original due date for the tax return, the monies paid to the IRS via withholdings is transferred to excess collections.
Then, if you file your tax return late, you may find that you are not credited with having made the tax withholdings. Needless to say, this can result in large balances being owed to the IRS.
Penalties for Filing Late, It Figures
Excess collections isn't the only problem encountered when filing late tax returns. Penalties also have to be considered.
Failing to file some types of tax returns is a crime, with criminal penalties. The government does prosecute taxpayers for failing to file tax returns. But it is not all that common in relation to the number of late-filed tax returns that are actually filed.
Depending on the amount of tax that will be reported and unpaid, it may be possible to get clearance letters or agreements that the government will not pursue criminal penalties if you voluntarily file your tax returns.
Filing late tax returns can also trigger civil penalties. Once the late tax returns are filed, the IRS will typically assess late filing penalties. This penalty is equal to five percent of the unpaid taxes, accrued monthly, not to exceed 25 percent of the amount of the unpaid taxes.
The IRS will also assess late payment penalties. The calculation for this penalty is more complex, but generally, it is the smaller of $135 or 100 percent of the unpaid tax.
These penalties are only assessed if the return is filed more than 60 days late.
Both penalties can also be abated if the taxpayer can establish reasonable cause for the failure to file or pay. In addition, the IRS has a generous first time abate policy that can allow the IRS to remove one or both of these penalties. The IRS applies this policy upon request by the taxpayer if the taxpayer has not had other penalties in the previous three years.
Get Help WIth Unfiled Tax Returns
Unfiled tax returns are a serious matter. They can result in significant penalties. If not corrected, they can also result in larger tax liabilities. The IRS is likely to file SFRs and assess a larger tax than what you would have otherwise had to pay.
There are a number of tax attorneys who help taxpayers with unfiled tax returns. An experienced tax attorney should be consulted when filing late tax returns to help minimize the tax liability and potentially to reduce any penalties that may apply.
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If you think that you may need help filing your 2018/2019 tax return or past due tax returns, you may want to partner with a reputable tax relief company who can help you get the max refund and reduce your chances for an IRS AUDIT.
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