Although you have plenty of reminders every April to file your federal income tax, it can be easy to forget. Approximately 7 million taxpayers omit to file their return every year, whether on purpose or by accident. If you are one of the roughly 5 percent of the population that failed to file, you may face penalties and collective action. There are several steps that occur before you are hit with a massive tax debt, and you have plenty of opportunities to rectify the situation by taking quick action.
Substitute for Return Filed
When you do not file your taxes, the IRS kindly does it for you with a Substitute for Return (SFR). Although this may seem like a nice service, it is not in your best interest. They use information received from other sources that does not include any exemptions, credits, write offs, deductions, or any other items that may reduce your tax liability. Therefore, you typically end up owing significantly more money in tax debt than what you would have if you were to file the return yourself, or have a professional file it for you.
Interest and Penalties
When you miss the April 15th deadline without contacting the IRS and asking for an extension, you immediately begin to accrue interest and penalty fees, which typically exponentially increase your tax liability. The IRS typically charges a .5 percent interest each month on the money you owe until you have reached a maximum of 25 percent. After you receive an Intent to Levy notice, the interest increases to 1 percent.
In addition to interest, you also owe a late-filing penalty, which will be 5 percent of the taxes each month up to five months. Once 60 days has passed, you must pay either $135 or 100 percent of the taxes, whichever is smaller. This money quickly adds up and often becomes much higher than the original amount of your tax liability.
Losing Social Security Benefits
In addition to compounding interest and penalty fees, you also may not be able to receive credits towards Social Security or Disability benefits if you are self-employed. When you fail to file any self employed income, then you are not informing the Social Security Administration of that self employment income. This means when it comes time to receive your benefits in the future, the amount for which you are entitles will not include the income for the year or years for which you did not file taxes. This could negatively affect your ability to pay your bills during your retirement.
Once the IRS has filed the tax return for you and calculated your tax liability and any interest or penalties, they will send you a bill. When you do not pay the proposed tax liability or negotiate it, then you may face even more interest and penalty fees. Eventually, you will find yourself facing collective action by the IRS, which could include levies, liens, and wage garnishment.
What You Should Do
As soon as you realize you did not file your taxes, you should go ahead and file a return, even if you cannot afford to pay your liability at this time. When you send in a past due return, it will replace what the IRS files on your behalf. This typically saves you a significant amount of money and may even completely relieve you of any tax debt. You also will no longer face penalties for not filing your return, although you may still accrue interest on the debt.
If you still owe a significant amount of money even after filing a return, you need to take action to pay it off so that you do not end up in worse trouble. You can negotiate a settlement, such as an Installment Agreement or Offer in Compromise, so that you can get out of debt and prevent any collective action.
Working with a tax professional, such as the ones at Fidelity Tax Relief can help you out of this situation. We can file your back taxes for you and reduce your tax liability. If you still owe any money, including any interest or penalties, we will help you negotiate a settlement so that you can get free of your IRS debt. Call us today at 877-372-2520 to find out how we can help you in your tax situation.