Our Firm often encounters individuals and businesses who have not filed income tax returns for many years. Oftentimes, someone went through a traumatic event, such as the death of a spouse, and did not file a tax return for that year. Or business owners may have had a dispute, and one owner may have taken all of the records, making it difficult for the other owner to file a tax return.
However, the consequences for a pattern of unfiled returns can be severe. They can include penalties, interest, and even jail time for willful failure to file a tax return. The IRS has a complex computerized system that can find out if you have not filed a tax return – especially if others have reported paying income to you. The IRS can file a substitute-for-return using the income reported to them on Forms W-2 or 1099, and they will not allow any deductions for business expenses, exemptions or itemized deductions. This can result in an astronomical tax bill.
Fortunately, it is possible to prepare tax returns for prior years even if you no longer have documents to support your expenses. The IRS will normally accept tax returns based on reasonable estimates. Its own internal manuals recommend using Bizstats.com in audits when accurate records are not available. Bizstats.com provides business financial ratios classified by type of entity, industry and amount of gross receipts, which can be used to estimate expenses.
There are many reasons to file tax returns for prior years. First, you can avoid penalties and interest that will continue to accrue on any amount that is owed. Second, to claim a refund for a tax year, you must file your tax return within three years of the due date of the return, and the IRS may hold any tax refunds that are due to you until past returns are filed. Third, if you are self-employed, your income will not be reported to the Social Security Administration until you file your tax return and you will not receive the Social Security retirement or disability benefits to which you are entitled. Finally, you may need to submit a copy of your filed tax returns to get a loan to buy or refinance a home, get a loan for a business, or apply for federal aid for higher education.
If you would like more information about how you can take care of unfiled tax returns, contact our Firm today.
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
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