Some people actually choose not to file a tax return with the IRS. But when they decide not to file it’s a carefully crafted decision. I’ll tell you about one person who chose not to file and why in this article. Here are some fine points about filing and not filing tax returns and dealing with the IRS. Some of this information comes directly from the IRS and some of it comes from lawyers and accountants. You should always talk to a tax professional when you have questions about your personal tax issues.
Now those fine points.
You don’t have to file a tax return in any year you are due a refund. That’s right — filing a tax return isn’t necessary even if you had a ton of income as long as you are due a refund.
WHY YOU MIGHT NOT FILE A TAX RETURN
A friend of mine who is an attorney hasn’t been filing tax returns for several years — but it was a carefully crafted and weighted decision on his part. Let me tell you his story.
His name is Bill and Bill was fighting with his wife about terms of a divorce. She wanted the divorce — but not Bill. As part of their legal wrangling, Bill’s wife wanted copies of his tax returns to justify her demands for alimony payments. Bill didn’t want to make big alimony payments (by the way, the tax law has changed on the deductions for alimony so talk to your tax and legal professionals). So Bill didn’t file his taxes but he was sure that his tax liability was paid in full so he wouldn’t have to pay any IRS penalties.
Bill made a careful decision.
PROBLEMS WHEN YOU DON’T FILE
But not filing a tax return with the IRS can open you up to other problems.
First, there’s a time limit for getting a tax refund and if you don’t file a return claiming a refund the IRS is not going to send it to you. If you want the refund you must file a return and claim the refund within the legal time frame which is generally three years.
The other problem is if you made a mistake on that return. If you’re actually owing money and you’re not really due a refund, by not filing a return you open yourself to extra penalties. My friend Bill is certainly hoping he didn’t make any mistakes.
MISSING TAX RETURNS CAN IMPACT A FRESH START
The IRS may not want any “blank years” if you seek a Fresh Start or Offer In Compromise program in the future. One of the requirements for a Fresh Start or Offer In Compromise program is that previous returns were filed. So just in case you’ll want a Fresh Start or Offer In Compromise program in your future, be sure all previous returns are filed.
Also remember that…
Taxes become due starting with the original due date of the return and not the extension date if you received an extension.
The IRS charges penalties and interest and sometimes there’s interest on top of the penalties.
While the IRS gives you only three years to claim a tax refund, the IRS can go after taxes you owe for many years in excess of 3 years in certain cases. And there is no statute of limitations that will stop the IRS from collecting taxes when a tax return isn’t filed for that year.
Here’s the bottom line for your money: Be careful if you play the “don’t file a tax return game,” and while the tax system is fair it can be “more fair” for the IRS than for you.
Give us a call if you want to find out your options for the Fresh Start Initiative or the Offer In Compromise program. And let us know if you didn’t file certain tax returns as we can discuss options with you.