April 15 is a full six months away, so who needs to worry about filing tax returns until after the holiday season? You — if you failed to file a tax return in past years — and there is no time like the present to get up-to-date with your tax return filing.
While you may think that an unfiled tax return here or there, or several years’ worth of unfiled returns, is not a big deal, it really is. It’s also something that needs to be attended to before it becomes a really, really big deal between you and the IRS. If you haven’t filed your returns because you feel like you can’t handle your delinquent tax payments, or you are afraid of the penalties you may face, know that the longer you wait to file and make contact with the IRS about alternative payment plans, the worse the potential pain will be.
Aside from the peace of mind that getting your prior year returns filed can give you, owning up to your unfiled taxes can benefit you in a number of ways including:
- Reducing the risk that the government will file substitute returns on your behalf. Maybe you have already received a CP3219N form (a.k.a. The IRS Notice of Deficiency) because you didn’t file your taxes. If you haven’t, and you continue to be in arrears with your tax payments, you may receive one. Essentially, the CP3219N form notifies you that the IRS is aware that you have not filed your return and have calculated your tax, penalty, and interest owed based on the wages and other income reported to the IRS by employers, financial institutions and others.
Maybe it sounds like the IRS is taking on the legwork involved in filing your taxes, but chances are, by having the government file your taxes, your income will be grossly overstated as the IRS will calculate your taxes owed by 1099s only, not taking into account any deductions for expenses that you may be eligible for.
- Putting you in a better position to negotiate payment plans with the IRS. Even if you can’t make full payments on your past returns, you should still file them—as well as filing your current estimated taxes on time. This will send a strong signal to the IRS that you are committed to catching up on your tax filings and payments, putting you back in their good graces and making you a better candidate for payment plans.
- Allowing you to take advantage of Voluntary Disclosure Agreements at the state level. A Voluntary Disclosure Agreement (VDA) is a formal contractual agreement between the state in which an individual owes taxes and the taxpayer where the state agrees to limit the look back period for the taxes owed and waive penalties on the taxes that are paid. In return, the taxpayer agrees to pay the tax and interest due for the look back period. The catch with VDAs is that you need to voluntarily (i.e. proactively) contact your state tax agency—before they contact you. So if you think you may want to pursue a VDA, don’t wait—ask a qualified financial professional who has experience with tax representation for assistance.
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- Freeing you to collect your current and past years’ tax refund. If the IRS has sent you a notice about needing to file your taxes for prior years, it is likely that when you file your current year taxes, any refund that you may be eligible for will be held until you meet your prior year obligations. This means that you have to file the prior years and pay the obligations for those years before you receive any refund. If you believe you may have been eligible for refunds in prior tax years, be aware that the IRS Statute of Limitations allows only three years from the original deadline of the tax return for you to collect your tax refund.
It is worth noting that the IRS and individual states are becoming more and more aggressive about collecting back taxes and pursuing those individuals who have not kept their tax filings current. For example, New York’s Gov. Cuomo has taken a strong stand against delinquent taxpayers, authorizing the state’s Department of Motor of Motor Vehicles office to suspend the licenses of motorists who owe more than $10,000 in back taxes to the state. Cuomo’s approach has been very effective, with thousands of drivers—faced with the prospect of losing their licenses—ponying up millions of dollars in tax payments. Undoubtedly, other states will consider this kind of tactic when faced with budget deficits which could be relieved, or at least reduced, with back tax payments.
While filing past year returns may seem stressful, with the right guidance much of the stress can be alleviated. It is much better to file and owe tax than it is to not file and have the IRS and state tax authorities possibly garnish your income. So stop procrastinating! Get your unfiled returns taken care of so you can face the coming tax season with a clean slate.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for consultants across the country. His website, www.cpaforfreelancers.com, has a resource section with how-to articles and information for freelancers.