I am often asked: “If I can’t pay the tax due with my return, am I better off not filing until I have the money to pay?” While the situation presents some complexities, the advice is simple: it is always best to file your tax returns on time even if you can’t pay. Such filing eliminates the failure to file penalty (which, along with the failure to pay penalty, can grow to as much as 25% of the tax due) and the possibility of the much more serious criminal consequences for not filing. (These are the IRS consequences; each state has similar rules for their returns as well.)
But what happens if I didn’t file a tax return, or worse yet, several returns? Here’s the good news, it’s not hopeless. Many people don’t file their tax returns. The reasons for non-filing can run the gamut from serious medical or personal issues, natural disaster, economic reversal, business failure, and so on. (I intentionally exclude illegitimate reasons for non-filing as the consequences for those are much different.) In my experience, if someone hasn’t filed for one year, typically they haven’t filed for several years. This prolonged period of non-filing typically starts with one of the reasons listed above, but the repeated failure to file results from the uncertainty – – really the fear — that “coming back into the system” will be too costly and potentially devastating. Those that do not file one or more returns very often find themselves in what seems an inescapable and unsolvable predicament.
Fixing a non-filing situation is not always pain-free but there are options for non-filers and certain choices are much better than others. Most importantly, for at least 25 years it has been the IRS’ policy not to press criminal charges for non-filers who voluntarily file their past due returns. Returns are considered filed “voluntarily” as long as the IRS hasn’t commenced any investigation or contacted the non-filer before the returns are filed. So the best option for the non-filer is to get the returns filed – before the IRS asks you to file them. (Even when the IRS asks for unfiled returns, it is not automatic that criminal charges will be asserted.)
What if you haven’t kept your records (W-2s, 1099s, etc.) to prepare your returns? Don’t let that be an excuse. All of that information is available from the IRS. In fact, if you plan to file returns for the past several years it is a good idea to request that information before filing just to be sure you report everything that the IRS already knows about. Once the return(s) have been filed, there are three basic options to then consider in dealing with the amount due: full payment (all at once or over time), settlement through an offer in compromise, or having the debt found to be “currently not collectible.” If penalties are been imposed after the return is filed, which is very likely to be the case, those additional charges may be removed if the taxpayer can demonstrate that the late filing was due to reasonable cause and not willful neglect.
Nonfilers that I have worked with are almost universally relieved to learn that the heavy burden of not being in noncompliance can be resolved, often with consequences much less severe than ever envisioned.