When you fail to file your tax returns, the IRS can take steps to make your life miserable. Below I will discuss some of the most common ways that an unfiled return can hurt you.
- When you fail to file on time, the IRS will automatically penalize you for your late return. The IRS will typically penalize you 5% for each month you are late, to a total of 25% of your total liability. This penalty can be a source of considerable shock when you finally see your total tax bill.
- An unfiled tax year also gives space for the IRS to get creative. The IRS can file a substitute for return, their attempt to guess at how much you would have owed in tax if you had filed. When they file their substitute, they do not give you any deductions, credits, or other break that you may be eligible for and they also may overestimate your income. A substitute is typically the worst case scenario for your tax return and, if you don’t file, the IRS gets to stick you with a much higher amount than you owe.
- Unfiled tax returns create a bad relationship between you and the IRS. In many cases, the IRS requires that all returns are filed before they will work with you. The IRS can and will continue to pursue forced collection activity, such as liens and levies, until you get all of your filings completed.
- Unfiled tax returns also can trip up a bankruptcy filing. If you are including the tax debt that you owe in your bankruptcy petition, having unfiled returns can result in your bankruptcy petition being dismissed without a discharge.
If you have unfiled tax returns or substitutes for returns that are giving you grief, you should contact a tax professional to review your case and advise you on how to proceed.
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