To start with, here’s what you must know about a possible refund. First, if your return qualifies for a refund there is no penalty for filing late. Second, if you do get a refund, remember that any amount gained will be held by the IRS if you omitted to file either of your 2022 or 2023 returns. Furthermore, it would also be applied to any amount if any still owed from these two years, and be used to offset any unpaid child support or student loans.
But what if, as feared, you end up owing money to the taxman for that year? Note this: whatever the amount owed, it is highly probable that it will be substantially less than the figure the IRS will come to if left to its own devices. To understand why we must look at how the government assesses your tax liability for the year which you did not file. In short, it takes an educated guess based on a variety of factors such as past income, sends you a notice and, in the absence of a response, produces a substitute for return (SFR) whereby a tax return is filed on your behalf.
The reason, irrespective of any penalties incurred, you’re likely to end up with a greater liability is that this substitute return may not include any deductions and exemptions you would surely have taken if you had filed your own return. Nor will the IRS acknowledge any expenses involved in earning a living that year, resulting in a higher taxable income than would have been the case if you had been involved. And remember that any penalties and interest would be based on the taxman’s greater estimated amount and be accordingly more onerous.
The IRS calculates the failure to file penalty based on the period extending from the original deadline to the date the return is eventually filed. The fine is 5% of the amount owed for each month the return is late up to a total maximum penalty of 25%. The failure to pay penalty is also based on the amount due and is 0.5% for each month that the tax is not fully paid. Similarly, interest is itself calculated on the amount in arrears. While rates change every three months, underpayment interest rates for 2023 stand at 8%, among the highest of the decade.
Clearly, unless you’re prepared to live the rest of your life in hiding, it behooves you to file. Tax evasion is a serious offense, likely to end you in jail. To file past year tax, you should seek copies of your W2s, 1098s, and 1099s for that year. If it all sounds too overwhelming, you should consider obtaining the services of a qualified tax preparer such as PriorTax.com. For a low fee of $35 per annum, you’ll work with someone who has a special understanding of the various issues and possible pitfalls involved in filing late taxes. Although late taxes cannot be filed electronically, your preparer will make sure to forward you a printable copy that you’ll then be able to forward to the IRS by regular mail.
Photo via manwithface on Flickr.
