When people fall on hard economic times, they often neglect to file their taxes. They may need money for necessities, such as food and rent, and cannot afford to pay Uncle Sam. However, even if you are broke, neglecting to file taxes is a poor strategy.
First, tax nonfeasance results in automatic penalties and interest.
In addition, the taxing authority adds monthly interest to the balance. The end result is owing far more at a time when money is short.
Worse, the IRS can figure your taxes for you, and that means minimum deductions. You end up having to pay penalties and interest on money you never owed.
If you have unfiled tax returns, confronting the issue now will save you money later. Here are some tips on dealing with past due returns:
Avoid the Substitute Return
The substitute return (SR) is what the IRS files in place of your missing return. It does this, so it can estimate your taxes, generate a bill and began the collection process.
The SR provides the bare minimum deductions. For example, the IRS may grant the taxpayer the standard deduction when the taxpayer is eligible for a much larger deduction through itemization. In addition, if you have business expenses, these also will not be factored into the SR.
The good news is that even if the IRS has filed an SR, you can still file your own return, which will replace the SR, so you can take all available deductions.
File Even if You Cannot Pay
Failure to pay because of lack of funds is no crime, so there is no reason not to file the return. By filing it, you also avoid the late filing penalty, reducing what you owe. Filing also ensures you avoid the SR. In addition, filing ensures that you do not forget deductions or lose records over time, resulting in paying more and difficulty in calculating your taxes.
Consider a Payment Plan
The IRS offers payment plans to all taxpayers. By filing and entering into a payment plan agreement, you prevent the SR, avoid the late filing fee and prevent you account from going into collections.
See if You Qualify for Any of the IRS’s Taxpayer Relief Programs
Like private debt collectors, the IRS understands that collecting some money is better than none. Since many taxpayers end up in IRS debt through no fault of their own, the IRS is willing to give those who qualify for tax relief a break on taxes owed, interest and penalties. Some of the most accessible programs include the following:
Offer in Compromise
An Offer in Compromise (OIC) is a settlement negotiation process initiated by the delinquent taxpayer. Taxpayers qualify if they cannot pay their full tax liability or if doing so would create dire financial hardship, such as losing your home or driving you into bankruptcy. The IRS takes into consideration your income, asset equity and ability to raise funds. Individual taxpayers apply by completing Form 433-A, Form 656 and submitting supporting documentation.
Penalty abatements provide another reason to file your tax returns, even if you cannot pay. To qualify for a penalty abatement, you must file your taxes, and it helps if you have no history of filing late.
The most popular type of abatement is the first-time penalty abatement, which applies to taxpayers who have never been delinquent on their taxes in the past. Many also qualify for a reasonable cause abatement based on extenuating circumstances. Examples include experiencing a natural disaster, hospitalization or serious illness.
Like most debt collectors, the IRS knows it cannot get blood out of a turnip. When delinquent taxpayers cannot afford to make any payments, the IRS may put their accounts into uncollectable status. This simply means the IRS suspends collection activity until the taxpayer’s financial condition improves enough to make collection efforts worthwhile.
Taxpayers can proactively protect themselves from IRS collection activity, including wage garnishment and property seizure, by requesting Uncollectable Status from the IRS.
Hard times always lead to increased taxpayer indebtedness. In the era of COVID-19, millions of individual taxpayers and small business owners have simply run out of resources and cannot pay their taxes. If you owe the IRS, remember that the sooner you act, the better your chances of qualifying for tax relief and the fewer penalties you will incur.
Hiring a tax professional to file past due returns and submit your application for tax relief is always a smart move. Thousands of dollars may be on the line, so a small investment to reduce your taxes and penalties is well worth it. The key to settling tax debt effectively is to lower your tax base as much as possible and gain relief under the IRS program most advantageous to you.
The Law Offices of Peter C. Rageas can help with your tax debt and resolve your tax problem. Our tax law firm located in Detroit MI has been helping clients throughout the Tri County area and beyond for over 20 years. Protect yourself and know your rights! Contact us today for a case evaluation.