But seriously… file your taxes. The IRS penalizes those who don’t pay their taxes and those who don’t file their taxes, and not filing is worse than not paying. You end up paying a penalty on the amount you owe at 5% per month (4.5% for not filing, 0.5% for not paying). You can easily rack up a huge penalty bill as daily interest is charged on any unpaid tax.
You may have been out of the country and it slipped your mind. Or perhaps you don’t have the money to pay the taxes you owe; or maybe you decided to emulate Irwin Schiff and not pay your taxes as a form of protest.
Whatever the reason, not filing your taxes can have serious repercussions. Sooner or later the IRS catches up to you. Just ask Wesley Snipes. The Blade star was convicted in 2008 and sentenced to three years in jail after failing to pay federal taxes over a 5 year period spanning 1999-2004.
To File or not to File
Filing or not filing your taxes is not really a choice. If you make over a certain amount, then you owe taxes to the government. They aren’t soft on people who don’t pay up. Tax evaders stand to face large criminal penalties, including huge fines and lengthy prison terms.
Some people try to distinguish between not filing and not paying, as though one were acceptable. Incorrect! They are both crimes! You will go to jail! Do not pass go, do not collect $200.
What happens if you don’t file?
If you don’t file a tax return, a form that is basically reporting to the government all of your income and other financial details for a given year, then the IRS may file what is known as a substitute return on your behalf. They use this to calculate the tax owed but to be sure: they are not looking to save you any money. Not only is the substitute return only filed for those who are delinquent, but they use it as a platform from which to levy penalties. The IRS also will not include all the standard deductions, meaning you end up with a larger tax liability than if you had filed, and as a result, a larger penalty.
You should always file your taxes, even if you can’t pay. Here are a few reasons why:
- Avoid the failure-to-file penalty
- Avoid the IRS filing a substitute return, allowing you to take advantage of standard deductions
- Starting the clock on possible audits: the IRS only has three years from the date you file to audit your return
- Starting the clock on penalty collection : the IRS has 10 years from the date you file to collection monies owed from taxes, interest and penalties
- Starting the clock on your eligibility for taxes, interest and penalties to be dismissed (two-four years after the date you file)
What if you can’t pay?
File your taxes anyway!
Your best approach is to work with the IRS: you can work out an instalment agreement, apply for a temporary delay on collection of your tax or try to qualify for a “offer in compromise” which allows you to settle your tax bill for less than you actually owe.
I get it. Filing your taxes can be a daunting task, and not everyone can afford to hire a professional. The IRS estimates the average taxpayer spends between $270 and $420 to file their taxes through a professional service.
You could file yourself, using forms printed out from the IRS website, but the chances of making a mistake are very real and could result in an audit if you’re not careful.
The IRS Free File program was created for just that reason. A private-public partnership between the IRS and commercial tax software companies like TurboTax, H&R Block, etc., IRS Free File is free for all taxpayers making less than $58,000 per year – which is over 2/3rds of the U.S. population.
TurboTax also offers a great service. They have five levels, with federal returns ranging from free to $100 and state returns averaging $40. They also provide live chat for tax advice – which is supremely helpful for those of us may feel overwhelmed at navigating a tax return.
There are other tax software out there, offering service at prices ranging from free to $100, including eSmartTax, H&R Block and TaxACT. There are a lot of great options out there for someone who wants to file their taxes inexpensively.
What Are Tax Deductions?
Part of the reason people use the help of tax professionals is that they know the tax code very well. Since 2001, Congress has made nearly 5000 changes to the tax code, and it is nearly 4 million words long. However, that doesn’t mean that a normal person can’t save money on their taxes using some creativity and applying some tax deductibles.
A tax deduction is any income that you deduct, or remove, from your taxable income, thereby reducing the amount you can be taxed on. So if you make $40,000 a year and you are able to apply a deduction of $10,000 then the IRS can only tax you on the $30,000 you made that year. Awesome!
For example, if you moved cities to start a new job then the IRS allows you to deduct some of those moving expenses from your taxable income. You can deduct the interest paid on your student loans, or any amounts you donated to support a charitable or volunteer organization. If you work from home then you can deduct some portion of your utility bill, insurance and even home repair costs.
What if the Government Owes You Money?
If the government owes you money and you don’t collect then it is considered unclaimed. Billions of dollars go unclaimed every year and two official websites have been set up to help people check if they are owed money.
The first is TreasuryHunt.gov, run by the federal government. There’s also Unclaimed.org, which is a state-by-state database. Simply click on your state and check if there’s a windfall in waiting. In 2011, a Kansas city woman found out she was owed $6.1 million in unclaimed funds! And that’s just one among many reasons to file your taxes.