File Your Taxes on Time, Even If You Can't Pay

By Kelly M. Walsh, Esq.

When tax season comes around, some people rush to file as quickly as possible so they can claim a refund, while others dread filing because they expect to owe money to the IRS. Some people dread it so much that they end up not filing their returns. The unknown tax debt becomes the monster in their closet that keeps them up at night and keeps growing year after year. Sometimes in life, it is best to buckle down and face your fears, and this is definitely one of those times.

The IRS assesses penalties against taxpayers who make mistakes, which include failure to file, failure to pay on time, and substantial understatement of your tax liability, among others. The failure to file penalty is typically 5% of what your tax due amount would have been had you filed, but If you file more than 60 days late there are minimum penalties, adjusted periodically for inflation. The current minimum failure to file penalty for returns due in 2018 or later is $210.

The longer you wait to file, the more likely you are to lose forms and forget about income. When you finally decide to bite the bullet and file your taxes from several years ago, maybe you don’t remember the part-time job you had for part of the year, some unemployment compensation, the retirement distribution, or capital gains on some investments you cashed out. The IRS will remember them, though. If you file a return that understates the amount of tax you should owe, the IRS will assess a Substantial Understatement Penalty, which is 20% of the understatement.

In addition to the unpaid taxes and penalties, you will be charged interest on the full balance, and the IRS has more aggressive collections options than other creditors. They also have a longer limitations period than other creditors and protection against discharge in bankruptcy. If you do want to discharge tax debt in bankruptcy, though, one of the many factors to determine if it meets the complex standard to discharge tax debt is whether you filed your returns on time.

Even if you will not be able to pay your tax debt all at once, it is best to file your return on time. Doing so reduces the penalties that will be assessed against you. It gives you a firm figure for the amount you owe, which might be scary, but is often less scary than not knowing and fearing the worst. I have even prepared back taxes for clients who realized in the end they had been missing out on refunds while dreading the possibility of a giant tax bill.

If you do owe, and you cannot afford to pay it all at once, it is possible to submit a proposal for an installment agreement or an offer in compromise along with your return, so you can get on a payment arrangement you can afford to pay back the tax debt you are dreading.

If you have past tax debt you cannot afford to pay, past tax returns you have not filed, or want to get a jump start on filing your returns on time this year, contact our office 717 657 7770 and ask about a consultation. I will be glad to talk you through your options and help you resolve your tax situation.