If taxes are owed and money is tight, a taxpayer may be tempted to simply not file. There is a common misconception that there is no point to filing if you cannot pay. Some taxpayers believe it is even dangerous since filing could alert the IRS to the owed tax. In reality, avoiding filing creates two significant dangers, increased penalties and interests, and a weakened negotiating position.
Taxes are due in full on tax day. For any delay after tax day, interest will accrue. This is true even if an extension is properly filed. Calculating penalties is more complicated and discretionary on the part of the IRS. Failure to file has the greatest negative impact on penalty assessment and will lead to the most aggressive posture from the IRS and the highest eventual bill.
If the taxpayer cannot pay the bill, a settlement may be the eventual resolution. Settlements, covered in an earlier post, are a negotiated agreement between the taxpayer and the IRS. If the taxpayer opens the issue, the odds of a best possible deal are increased. If the taxpayer simply waits, the IRS will eventually notice and may even complete a tax return, based on the information they have available. Disputing an agency generated filing will be very difficult, if not impossible.
There is never a benefit to forgoing filing, and there will always eventually be additional difficulties caused by failing to filing. At some point, the taxpayer will have to face the issue. Voluntarily coming in from the cold, even after years of skipping, is the best course of action.
If filing is significantly late or covers multiple years, the taxpayer should consider getting assistance in reconstructing late filings and in approaching the IRS. Please contact us if you would like assistance.