Six Reasons to File your Income Tax Return

Almost 100 years ago Supreme Court Justice Oliver Wendell Holmes observed that “taxes are what we pay for civilized society[1].” For Justice Holmes paying taxes may have been a moral imperative, but beyond wanting to win a good citizenship award, are there any other good reasons for filing your income tax return each year? If you suspect that doing so avoids a lot of potential problems, perhaps you have what it takes to be appointed to the Supreme Court. Let’s look at six (6) good reasons for filing.

  1. You can lose the right to claim income tax refunds   

Even when they haven’t filed their returns, many people have still paid taxes. Employers frequently withhold more than enough tax from their employees’ wages to pay all the tax due to the IRS, and they issue a form W-2 to their employees at the end of the year. When you overpay your taxes, you are entitled to a refund of the excess, but in order to get that refund, you need to file a return to claim it. The deadline for filing a return to claim a refund is 3 years from the due date of the return. The IRS refers to this deadline as the refund statute expiration date, or RSED. And if your return is filed after the RSED, your refund claim is barred. Sadly, this happens all too often. For the tax year 2016 alone refunds unclaimed by taxpayers exceeded 1.5 billion dollars. [2]

  1. If you owe taxes the IRS charges a substantial penalty for late filing

In those cases where you owe taxes, the IRS imposes late filing and late payment penalties. The penalty for late filing is 4.50% for each month or part of a month your return is late, up to a maximum of 22.50%, while the penalty for late payment is .50% per month until the IRS sends a bill for the tax (called a notice of assessment and demand for payment), at which time it increases to 1.00% per month, up to a maximum of 25.00%.

To illustrate, if the tax due on a return filed 5 months late is $10,000, then the failure to file penalty will be $2,250, and the failure to pay penalty will be $250. The failure to file penalty alone is equivalent to an APR of 56.25%. A simple way to reduce these penalties is to file the return on time, even if you can’t pay the tax. In this example, filing on time will save $2,250.

In addition to penalties, the IRS also charges interest on overdue taxes from the due date of the return, until the tax is paid. The combined cost of penalties and interest far exceed the cost of borrowing, even at sky-high credit card rates.

  1. Until you file there is no statute of limitations preventing the IRS from assessing additional tax 

When you file an income tax return, the IRS generally has 3 years from the date you filed to audit your return and assess additional taxes. But unlike the limitation on claiming a refund, if you don’t file an income tax return, the IRS can legally assess additional taxes at any time without any time limitation. This is because the statute of limitations on assessing tax (the “ASED”) doesn’t start to run until a return is filed. If no return is filed, there is no statute of limitations on assessing tax and nothing to prevent the IRS from sending you a huge bill.

Even so, the IRS typically only seeks to enforce filing obligations for the current year, and the previous 6 years. So even if you haven’t filed for many decades, you can typically get compliant if you file returns for the previous six (6) years.

  1. The IRS can estimate your tax, but it’s usually much higher than if you filed

If you don’t file, the IRS can take whatever information it has, and prepare a tax return for you[3]. This is called a substitute for return (“SFR”), and in preparing it, the IRS will assume you are single with no dependents and no deductions. This means that a tax computed by the IRS will usually be far more than what you actually owe. If the IRS does prepare a substitute for return, it will generally permit you to file a correct return based on your actual situation, and it will use the numbers on it to reduce your tax liability. Of course, this will probably increase the likelihood that you will be audited.

  1. Getting or refinancing a mortgage can be very difficult if not impossible

                If you apply for a loan to buy a home or refinance an existing mortgage, one of the first things the bank is going to request is copies of your income tax returns. If you don’t have them, you can forget about getting a loan. And if you give them returns that were not filed, you can be charged with a federal crime—bank fraud.

  1. Not filing is a Federal Crime                                                                        

                Still not convinced. Then there’s one last thing you should know: failing to file an income tax return is a crime that can result in fines of up to $25,000 and imprisonment of up to 1 year for each year that is not filed. Criminal penalties are substantially higher if you do something improper to evade your filing obligation, like giving your employer a false W-4 claiming exemptions that you aren’t entitled to.

Do you have unfiled returns? The Kauffman Group can help

If you have unfiled returns, even for 10 or more years, it’s not all doom and gloom. The Kauffman Group is a team of attorneys and CPAs with decades of experience dealing with IRS tax matters. Steve Kauffman, the founder of the Kauffman Group, is a CPA, attorney, and former IRS agent with over 30 years of experience. He and his team are experts at resolving tax problems, including unfiled returns, and can get you back on good terms with the IRS.

Want to know more? Send Steve an email at , and he will get back to you personally.

[1]Compañía General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927)

[2] See IR-2020-135, July 1, 2020

[3] See IRC §6020(b)

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