“To File or Not To File, That is the Question”
In 2009 John spent a lot of money on braces for his daughter and when he prepared his 2009 tax return in March of 2010 he had a balance due of over $5,000, which due to the cost of the braces he had no funds available to pay to the Internal Revenue Service. So he made the choice to not file the 2009 tax return. When he went to prepare his tax return in March 2011, for the 2010 tax return, he remembered he had not filed the 2009. Since he had no contact from the IRS on the prior missing return, and afraid to bring attention to this fact, he decided to not file the 2010 tax return, and the same thing happened for the 2011, 2012, and 2013 tax returns. The IRS finally realized he had not filed these returns, and prepared the returns for John. When the IRS files your returns, called a SFR (Substitute For Return) they file you as married filing separate, no business deductions, and no credits. They then send you a statement of the proposed tax liability and you either pay this amount or prepare your own accurate returns and arrive at the proper tax liability.
When you file a tax return, the IRS normally has 3 years from the due date or the date filed to examine this return, and 10 years to collect any tax liability from these returns. When you choose to not file the tax return in a timely manner these statutes, the time left to examine or perform collections, never starts. Even when the IRS files for you and have a liability these time limits do not start running. When you have a filing requirement, for either a refund due return (you lose the ability to receive a refund after 3 years) or a liability, file on time to avoid additional penalties for late filing or non-filing. Once the return is filed the IRS will work with you on a payment plan, reduction in liability, or other plans to keep you on track and in compliance. Not filing the return will not make the liability go away, and will only make it harder to resolve tax issues. If you are not in compliance with filing your returns they have no reason to work with you and grant any relief. Your tax professional can help you resolve he back year tax problems, work with you to not have a tax due return in the future, and let you rest assured the IRS is being taken care of to avoid additional problems.
When John met with his accountant to prepare these missing tax years, and correct the returns filed by the IRS, he had a tax liability of less than he imagined, they worked out a payment arrangement, and finally was able to stop worrying about the IRS seizing his bank account and wages. Not filing due to inability to pay will never be the smart thing to do, and if you plan you can avoid so many problems. If you have a really large tax liability the IRS can and will work with you so long as you are in compliance and provide them with the information they need to assist you.
For more information on the different options available to resolve prior tax issues consult a tax professional, or of the amount owed is less than $50,000,contact the IRS directly and they will work with you. Using a tax professional will make ot easier, as they talk to the IRS on a regular basis, and can further explain the options available to you