Tag: tax penalty

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Tax Audit

What Information or Documents Do You Need in a Tax Audit?

income statement

Nobody wants to be audited because it’s a bit—sometimes a lot—of a hassle for the taxpayer or business owner. When you own a business, you want to focus on running and operating it. An audit from the Internal Revenue Service (IRS) means spending some time pouring over documents and submitting them to the government.

Here are some reasons why the IRS would tag you for an audit:

Too much income

Not a lot of people get audited. But based on statistics, the more income you have, the more chances there are of you being audited. According to the IRS, it audited less than 0.5 percent of tax returns among people with income between $50,000 and $75,000. Among those who earned $10 million, about 20 percent of them were audited in 2016.

Information that doesn’t match up

This is why sometimes you need the help of professionals to file your tax return to ensure that the documents you file match records that are with the government. Keep tabs on your expenses so that your tax return will be properly filled out.

Landlord

When you own a number of properties and you rent them out, chances are the IRS will take notice.

Self-employed

Freelancers are usually targeted just because the information they provide is not always as clear-cut or formal as those employed by a company.

These are just indicative of probabilities, though. It’s not a guarantee that when you hit any of the above, you will be automatically audited. There is just a higher chance of an audit. But when you do get audited, there are documents or information you need. Most of the following paperwork will aid you in tax deductions. A tax audit is actually quite easy to handle when your documents are in order. Here are some documents and information you will need during a tax audit:

 

Bank account statements

The IRS would want to look into your financial activities.

 

Receipts

These are proof of what you actually spent on. As a taxpayer, you should always keep your receipts—these include credit card statements, receipts from retail and receipts from donations from charitable organizations. Whether as an individual taxpayer or as a business owner, receipts really do come in handy come tax season.

 

Bills

Just like receipts, bills will also come in handy during tax season, and especially when you get audited. If you know your tax obligations and privileges, you would be aware that there are some bills that would merit a tax deduction. And that’s why you need to keep your bills for the rainy day like the filing of the tax return or your defense during a tax audit.

 

Canceled checks

Keep canceled checks. Among possible canceled checks are from the sale of a home, renovations of the home, payment for the individual retirement account, donations to charitable institutions.

 

Loan agreements

You need to keep paperwork for loans. This will be used as a reference during an audit. But even if you don’t get audited, paperwork from loans is still important documents to keep.

 

Investment statements

When you have investments, keep the paperwork both for possible tax audit and for your personal documentation.

The IRS handles the audit in two ways: a tax agent may interview you in person or it could all happen through the mail. Don’t prepare your documents passively. Every document should be prepared as it comes. This way, everything will already be organized when it’s time to file the tax return. But the real reason for the tax audit is to determine if your finances are in order and if you are paying the appropriate tax amount. It will basically examine all your financial records to determine if you were telling the truth in your tax return.

 

But there are practical ways to reduce your chances of being audited by the IRS. Here are some of the steps:

Be honest

As long as you report every cent you earned from your employer or business, then you most likely will not be audited. Although, honestly, in this case, is usually validated by the recordings—whether what you reported in the tax return coincides with the record of the government. Don’t seek deductions that are not authentic, like, don’t claim that you have donated to a charitable institution when you really didn’t just to enjoy a tax relief.

 

Double check your numbers

This is one of the reasons why it really helps when you get a tax expert to help you with your tax return. They know best how to calculate your tax. They know best what to report in your tax return. And they know best what kind of deductions to ask for based on your profession or business. But if you don’t want to spend for professional help, just make sure you do your numbers correctly and you double check if you made the right calculations. There are apps that could help you with this, by the way.

 

Get professional help

Sometimes it’s worth paying extra for a tax expert than not to have one. Tax returns are their wheelhouse. This means that mistakes will be limited.

 

Keep tax records

Keep tax records for at least six years. This way, you could just go over your previous tax returns for easier reporting. According to experts, the IRS imposes an audit window of three years. But it would be more prudent to keep six years’ worth of IRS records.

 

Shred your papers

Don’t throw IRS papers in the trash can because these contain sensitive and personal information. Identity theft is on the rise so make sure you protect yourself from the possibility of falling victim to identity theft by shredding your documents.

 

Tax audits are really not scary as long as you did nothing wrong. Keeping documents will make an audit easier for you. However, going through an audit is cumbersome, not to mention nerve-wracking. There is always a chance you could have made a mistake in your tax return, which may have dire consequences. Good thing the IRS is not unreasonable. As long as you would be able to explain yourself, there is really nothing to fear.

 

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Business Taxes

What You Need To Know About the IRS Failure to Deposit Penalty

Unfiled tax returns help san diego

It is the employer’s responsibility to withhold the income tax on the paychecks of their employees. The United States Treasury monitors the periodic payment of these amounts. Any discrepancy will be assessed by the IRS, and a failure to deposit penalty (FTD) may be meted out. This particular penalty increases with every delay in submitting a payment. Tax penalties can be reduced if the funds are promptly remitted in a timely manner. The FTD penalty may be waived should a reasonable cause be presented and defended. The request for a first-time penalty abatement (FTA) can be another method to take.

What is the Failure to Deposit Penalty?

Federal Income, Social Security, and Medicare taxes need to be withheld from the paychecks of employees by their employers. Make sure to calculate the correct amount so they are as accurate as possible, and follow the deposit schedule for your business so this gets remitted to the Treasury.

Besides depositing on time, make sure to deposit through an electronic funds transfer to avoid this FTD penalty. Do not use unpaid tax deposits to cover pending business expenses. The penalties and interest that will be charged are quite bigger compared to other forms of credit.

Failure to do these obligations will incur you an FTD penalty by the IRS.

How to Avoid the Failure to Deposit Penalty?

Did you know that the FTD penalty starts to accrue on the first day you were behind your tax payments? 

To avoid a penalty even on the first day of late payment, you must get more information about the deposit schedule. It’s important that you won’t incur a penalty because you deposited the payment in an untimely manner. There are quarterly, monthly, or semi-weekly deposit schedules for the taxes you are depositing based on the amount.

To reiterate, your number tax obligation is: PAY ON TIME. But the two other responsibilities include paying the full amount and using the proper payment method. 

If you are unable to use the right payment method or remit the correct amount, the FTD penalty will be charged to your ignorance or incompetence.

What can be a possible charge for the IRS Failure to Deposit Penalty or Penalty for Late Payment of Payroll Taxes?

There are four tiers to the FTD penalty structure. The more you delay the payment, the penalty amount also increases.  Here’s the guide to the amount of FTD penalty or charges:

1 to 5 days late – 2%

6 to 15 days late – 5%

more than 15 days late – 10% 

(This also applies to a 10-day period after the first IRS notice is received requesting for this prompt tax payment)

However, a 15% penalty will be charged if you don’t fulfill your tax obligations within 10 days or after receiving the first IRS notice.

Also, take note that the deposits not made by electronic funds transfer are subject to the 10% penalty rate. If you deposit less than the amount of taxes you owe, the FTD penalty will apply to the part of the payment you still owe. You should pay as much of the required amount as you can and make late payments as soon as possible to reduce penalties and interest you owe.

Please note that if these deposits are not processed through an electronic fund transfer, they will be subject it to a 10% penalty rate. Paying less than what is owed will trigger an FTD penalty to the balance, too. The smart thing to do is to pay the entire amount as much as possible and settle the balance for late payments so your interest and penalties can be reduced.

You’ll face severe Trust Fund Recovery Penalty (TFRP) if the IRS justifies that you willfully avoid paying the payroll taxes. If you are the person responsible for the collection and submission of these payroll taxes and you weren’t able to complete this task, you are liable to pay the TFRP. That penalty is 100% of the unpaid trust fund taxes.

What are the accompanying interest rates for the Failure to Deposit Payroll Taxes?

There is a quarterly publication by the IRS stating the interest rates applicable to late payments. The most recent interest rate for late payments has been pegged around 3 or 4 percent. When this remains unpaid, the interest will continue to accrue until the time the amount is paid in full. Should there be a reasonable cause, the IRS can waive or abate the FTD penalty. Even with penalties deferred, interest on delinquent tax payments still continue to accrue.

With the Failure to Deposit Penalty, is it possible for it to be waived or even reduced?

There are procedures to help make this happen. You can request for a first-time penalty abatement waiver from the IRS for the FTD penalty. But, the business must be free of other significant penalties for the past three years in order to qualify. And the business should still comply with filing standards as well as the payment.

This FTD penalty can also be waived by the IRS if there is reasonable cause. If there had been changes to the schedule or the frequency of your tax deposits and a failure to remit, the IRS can be understanding about this. Make sure that you are diligent in paying taxes so the IRS can waive the penalty because, for instance, the monthly payments became semi-weekly, that switch needs that adjustment period.

The default setting for the IRS is to apply payments to your most recent tax liability. But, you can specify the application of your payments according to your wishes by sending a request to the IRS. The oldest liability can be settled first so that this helps to reduce your delinquencies.

The IRS has the power to collect from you any unpaid payroll taxes. A lien can be placed on your business by the IRS. The FTD penalties can be waived or settled over time if you can negotiate an arrangement with the agency. Seeking professional advice from a tax consultant can provide you with what means are available to you in closing out unpaid payroll taxes.

 

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Business Taxes

What is the IRS Trust Fund Recovery Penalty and How do you Settle This?

Trust Fund Recovery Penalty

Medicare and Social Security contributions are usually withheld from your employees’ paychecks. Some income tax is also part of this. These amounts are considered as trust fund taxes, and these must be sent to the IRS. Neglecting your obligation will incur you a Trust Fund Recovery Penalty from the government, which is a very serious charge.

What is this Trust Fund Recovery Penalty (TFRP)?

Because you have neglected or ignored to send the amount from the withheld income tax, Medicare, and Social Security payments that come from the paychecks of your employees, this will incur you

The TFRP or Trust Fund Recovery Penalty happens if you intentionally ignored to send the amount from the withheld income tax, Medicare, and Social Security payments that come from the paychecks of your employees to the IRS. 

This is a serious penalty, and the IRS doesn’t mess around when they discover that you are responsible for missing payments. As soon as the IRS discovers this anomaly, they will seize your personal assets to recoup the money owed to them.

For the TFRP, who is the one held responsible?

The IRS will levy this penalty to those who have intentionally failed to collect and pay trust fund taxes.

The owners of the business, Chief Executive Officers, directors can be held liable. The people working for the company can also be included. Third-partied like payroll administrators, outside accountants, and bookkeepers may also be found responsible. Shareholders of corporations will also be held responsible; while members of a board of trustees for a non-profit may be sought after.

Those who are in charge of collecting and paying these taxes for a particular organization will be held responsible. Even those who feign ignorance but are aware of this unlawful act will be held accountable.

Simply put, the IRS will seek out those who should be responsible for remitting such payments, and this may include multiple individuals.
The IRS needs to prove and establish that the individual(s) in question are aware of this requirement to send these taxes and didn’t do anything about it. There was a decision to ignore the law willfully. Using these trust fund taxes to pay another bill is an example of willful negligence.

How much is the Trust Fund Recovery Penalty?

The amount for the penalty will equal the amount of unpaid taxes and that means all income taxes withheld, including Social Security and Medicare contributions. This falls under the FICA or Federal Insurance Contribution Act taxes.

Let’s consider that one employee gets paid $1,000. That paycheck withholds $100 for income tax, $62 for Social Security and $14.50 for Medicare. If this wasn’t remitted to the IRS, this total of $176.50 becomes the amount of the penalty. The IRS will collect this as a penalty amount, and they’ll also collect the same amount for taxes owed. So, you are being charged double because of non-compliance. This is the total for just one employee. Multiply that for the number of employees in your roster and watch your tax debt grow.

If a Trust Fund Recovery Penalty is assessed by the IRS, what will happen next?

When the IRS suspects the non-payment of trust fund taxes by a certain company, an agency officer will begin assessing who should be responsible. This process means that the IRS requires multiple documents and pertinent information from the company.

These are the documents that the IRS will scrutinize:

  • Bank statements
  • Cancelled checks
  • Passwords for accessing online accounts
  • PINs for bank cards

This will allow the IRS to trace who pays the bills, who control the disbursements, and how was this distributed.

Articles of Incorporation or partnership contracts will also be scrutinized, so the organizational structure can be better determined. The agent then zeroes in on the responsible individual(s) and will request to interview them at the soonest possible time.

 

What is the Interview for a Trust Fund Recovery Penalty?

The Form 4180 interview allows the IRS to summon the owner of a company or the individual the IRS thinks is the one responsible for this mismanagement of taxes to verify their suspicions. There are links available for more detailed information on this interview process, as well as how to avoid an interview.

What are the steps you can take to settle the Penalty?

There are options to appropriately settle this tax debt. There’s a payment plan or an installment payment option in case the amount cannot be immediately settled in full. The offer in compromise program or even a partial payment installment agreement may be able to assist you to settle the debt for a lesser amount.
Don’t wait for the IRS to garnish your wages or even seize your assets. Contact them right away so that an agreement can be arranged. Declaring bankruptcy will not discharge these penalties.

How do you define Non-Trust Fund Taxes?

Employees trust their employers to remit their funds to the government on their behalf so these are called trust fund taxes. The employers must safeguard this money in a trust fund until it gets sent to the IRS. These funds are solely for that purpose.

Non-trust fund taxes are from the time employers match the contributions of their employees for Social Security and Medicare contributions. The IRS looks to the business to be responsible for these non-trust fund taxes. Individuals are not factored into this. The exact liability, however, is dependent on the business structure. Personal liability for both trust fun and non-trust fund taxes may be incurred by those who are self-employed or are found to be the sole principal of an LLC.

What forms are needed?

The IRS will send a Letter 1153 for those that they deem responsible. Attached to this will be a Form 2751. Once this form is signed, you are admitting to such a liability. Check out other links on what to expect and for more information about these forms.

Is there a Statute of Limitations for the Trust Fund Recovery Penalty?

The IRS has a period of 10 years to assess a penalty and to collect from it. In that time frame, the IRS can hold on to your assets because you have been found to be the one responsible for such a liability.

But, the assessment by the IRS has only a 3-year validity. April 15 is the starting point if trust fund taxes haven’t been collected from that date or even a few months before that. If the IRS fails to investigate a company that hasn’t paid any trust fund taxes from a company in a possible period of April 15, 2018, to April 14, 2021, no further investigations or interviews can ever be conducted after that assessment period.

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Tax Tips

Celebrities with Tax Evasion Cases

nicolas cage with tax evasion case

No matter what your status in life, when you’re cited for tax evasion, you will be stalked like a celebrity. Ironically, let’s look into some tax evasion cases that some celebrities had to endure.

Martha Stewart

If you don’t look after what taxes your assets are liable for, then you will be forced to pay up when the time comes. That’s what happened to this lifestyle guru who didn’t fully realize that her East Hampton mansions generate taxes. The State of New York sent her a bill for $220,000 in back taxes and penalties. She said that she hardly spent any time there, but that didn’t hold water for the authorities concerned.

Wesley Snipes

This action star failed to file a federal income tax return. His tax debt ballooned to about $17,000,000 due to back taxes compounded by penalties and interest. He failed in an attempt to pay off a portion of it in 2008, so he was sentenced to three years jail time which began in December 2010.

Willie Nelson

A bogus tax shelter in 1990 didn’t spare this country superstar from remitting $16,000,000 in back taxes and fines. Some news later revealed by Price Waterhouse that they failed to pay Nelson’s taxes for years and invested the funds instead.

Nicolas Cage

This actor trusted his ex-manager and accountant too much. They ended up making poor investment choices in real estate and failed to pay his taxes. Cage tried to make amends with the IRS, but he still had to settle considerable fines.

Marc Anthony

In 2007, Anthony owed the IRS $2,500,000 in back taxes. By 2010, he also received two more bills amounting to $3,000,000 in unpaid taxes on real estate. This singer blamed his management, but the IRS received zero tax payments for a number of years.

Annie Leibovitz

This talented photographer was unable to fix her financial concerns so, from 2004-2007, she owed $2,1000,000 in unpaid taxes. To get a loan to pay her debts, she was forced to pledge the copyright of every photo she took, and even the ones would take in the future.

Darryl Strawberry

Even professional baseball players that win World Series championships are not exempt from taxes. Strawberry failed to declare taxable income, even the ones derived from autograph signings and memorabilia shows. Tax evasion convictions came soon after to collect on these undeclared earnings.

Boris Becker

The German tax authority ran after this tennis phenom for $3,000,000 in back taxes from prize money earnings, endorsements and appearance fees. Becker claimed to be in Monaco, a tax haven, from 1991-1993. When he was found out to be just in Munich with his family, the tax collection was the next thing he had to serve. No love lost there.

“Survivor” Richard Hatch

After winning the first season of “Survivor,” he assumed that the network would pay the taxes on his $1,000,000 prize money. Hatch was found guilty of tax evasion in 2006 and served part of a six-year prison sentence. Better pay the IRS especially if you won such a largess on national television.

Heidi Fleiss

So, how do you pay taxes from illegal earnings? That was this Hollywood madam’s excuse which led her to be sentenced for tax evasion in 1997 due to her high-profile prostitution ring.

 

The main lesson here is to make sure you pay the government what you owe. If you don’t, they’ll find a way to collect what’s due regardless of your fame or reputation.

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Tax Tips

What do you do if you owe back taxes?

Help with irs back taxes san diego

Because of the “Taxpayer Bill of Rights” recently adopted by the IRS, you need not fear the taxman. Let’s check out some tips to help settle your back taxes debt and try not to dig yourself into a deeper hole.

Tax Tip No. 1
Please do your utmost to settle back taxes on time and in full. You will avoid penalties and accrued interest. When these penalties accrue, the IRS might not be convinced to give you some leeway to abate them.

Tax Tip No. 2
You have that right to submit more information to the IRS to clarify on less tax owed or seek a basis for penalty relief. Illness and military service are included on those valid reasons. Long-term non-filers are allowed to provide that relevant information most especially if there was or there was no direct involvement dealing with the IRS. This tax agency may not be privy to possible tax credits or qualified deductions for your particular case. They will follow a certain template. The tax liability may be computed as higher than what was actually warranted. This forces the non-filing taxpayer to submit a correct return and achieve a compliant status.

Tax Tip No. 3
A repayment schedule may be negotiated. Interest and penalties still apply during this repayment period. Late payments will not be tolerated by the IRS once a repayment agreement has been signed. This may cause you more trouble or it may even revoke your repayment status if you are found to have missed out on a payment or have been irresponsibly delinquent with such. The IRS may deem you as an unreliable payor should you wish to renegotiate for another repayment scheme.

Tax Tip No. 4
“Innocent Spouse Relief” may be possible because of the noncompliance of your spouse. More information for eligibility may be reviewed with IRS Publication 972 and Form 8857. These cases often review the unreported income of a spouse that wasn’t provided on the return.

Tax Tip No. 5
What might be hypercritical is to have competent representation on hand to properly argue your case. You just might be able to save more money in the long run once you are able to acquire the services of a qualified professional. Check your local or state Certified Public Accountant society for more details. Review with them about who really deals with the IRS on a regular basis. Your state or local bar association might be able to refer you to a tax lawyer as well.

A Low-Income Taxpayer Clinic (LITC) may provide pro bono services if you are not able to afford these services on your own. They remain independent from the IRS, even if funding may be provided from an IRS grant program. The LITC can assist you in seeking proper representation and resolve any issues with your account. Log on to www.irs.gov/Advocate/Low-Income-Taxpayer-Clinics to research on such available assistance within your vicinity.

 

 

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Unfiled Tax

Reasonable Cause for Penalty Abatement

How do you apply for reasonable cause when processing your penalty abatement?

For most instances, penalty abatement requests to the IRS are handled on a case by case basis. You should have a valid reason, or reasons, as to why you paid or filed late since you are not applying for a first-time penalty abatement (FTA). The reasonable cause becomes the most common reason in seeking penalty abatement.

You will qualify for this reasonable cause if the IRS is thoroughly convinced that you had a very legitimate reason for being unable to fulfill your tax obligations. They are also looking into the effort you’ve done. Let’s just say that if you claimed that you just felt lazy and decided to chuck your tax duties, then that’s a very unreasonable cause.

So, what can be considered as a Reasonable Cause

Any legitimate excuse for you to miss out the payment or filing on time can be looked into as a reasonable cause. The circumstances presented show that it was out of your control. As persistent as you were in trying to file, the extenuating situations made it impossible for you to do so.  

Let’s look into a variety of common examples for a reasonable cause:

  • There was death in the family or a close personal friend suddenly passed
  • You were stuck in rehab or you were serving a prison sentence
  • While abroad, you found yourself being held against your will
  • Because of a fire, a sudden flood, or other disasters, your records were inadvertently destroyed
  • There was a mail or transport strike, even a riot, and these civil disturbances prevented you from remitting your payment.
  • By some fluke, you were unable to compute the correct amount of tax to pay
  • A tax professional gave you ineffective advice even if this came from a competent and trustworthy source

What are the other details you can submit to prove reasonable cause?

These are some questions the IRS might ask if the above examples don’t apply to your situation:

  • What is your present circumstance and how did that prevent you from filing your taxes?
  • What are your other delinquencies aside from your tax debt?
  • Are you aware of the deadlines for filing and were you able to properly prepare?
  • What were other situations beyond the scope that caused you to be delinquent?  

If you have a history of paying late, the odds are against you. Please submit any medical records or newspaper clippings to prove your complex circumstance.

Compared to other tax debt settlements, the requirements for penalty abatement are not that stringent. The IRS wants to give this a personal touch because they really want to investigate that because of what you went through, filing your tax return became an unintentional miss.

Please consult with a tax professional to review if your reasons can be considered as valid. This paperwork needs to be submitted so the reasonable cause can be noted and your penalty abatement can be approved.

Categories
Unfiled Tax

What are the Consequences for Unfiled IRS Tax Return

When you were still in school, you would be punished for your tardiness. You are facing the same consequences at work when you come late and unprepared.

Filing late federal tax returns and owing back taxes will lead to serious drawbacks on your time and finances. If you don’t owe any tax, it is still reasonable to file to be on the safe side.

Below are the consequences of not filing your federal tax return on time. A lot of states are doing the same because they have the authority to do some of the things the IRS is incapable of doing.

Penalties

If you don’t file a Federal tax return on its exact due date, you will face a failure-to-file penalty if you owe taxes. You will be paying an additional of 5% of the balance for every month you miss. The penalty can go up to 25%.

If you’re 60 days late, your minimum penalty is the lesser of $205 or 100% of your tax owed. But if you don’t have any tax debts, there are no penalties, but you may face other issues.

No Refund

You won’t get a refund if you don’t file. This rule applies to federal and most states with an income tax. You have a maximum of three years to file your federal return, but when you lapsed, you will lose the chance to claim your refund.

No Losses Can Be Carried Over the Next Years

A person with business or investment losses can be allowed by the IRS to carry forward those losses to not compensate the earnings in the succeeding years.

In the event that a loss occurs, you need to file a return to inform the IRS about this incident. If you don’t file, you won’t be allowed to carry the losses forward from that particular year.

Tax Credits Can Be Lost

If you are qualified for a tax credit like the Earned Income Tax Credit (EITC), you will need a filed return for you to claim it.

Tax credits are refundable and they can go back to your pocket. You must file a return to earn the credit and never lose it.

Substitute for Return (SFR) Drawbacks

In some cases, when your tax return remains unfiled, the IRS can automatically accomplish a Substitute Federal Return (SFR) for you.

The SFR contains details from your 1099s, W2s, and other forms the IRS took from your employer, your bank, or other entities. Most of the time, the SFR offers only one exemption, no dependents, and the standard deduction.

Unfortunately, if you qualify for more than one exemptions, have dependents, or have itemized deductions, the SFR will offer a higher tax liability compared to the amount you owed when you had filed the return yourself.

Statute of Limitations to Audit Will Not Happen

After you file your tax return, the IRS has three years to audit it. The Statute of Limitations kicks in, and the agency won’t be able to audit the return.

However, the Substitute Federal Return (SFR) can be audited at any time by the IRS.

This means that when you file on your own, the IRS won’t generate the SFR for you. The IRS will generate the SFR after a few years from the due date.

You May Not Include Taxes in a Bankruptcy

To qualify for both Chapter 7 and Chapter 13 bankruptcy, you need to file your taxes on time or on the most current year.

For Chapter 7, you must file the last two years of returns. Chapter 13 should have at least four tax returns filed.

Imprisonment

There’s a rare chance for you to get in jail for being delinquent on your taxes. But it’s possible for you to face jail time.

Under the federal law, you can be imprisoned up to a year and pay $25,000 in fines for not filing your return. The penalties may be more rigid if you commit fraud.

Remember that you won’t go to jail for just owing taxes. But you can go to jail for not filing your taxes and for intentionally evading your responsibility.

Loan Complications

It will be very difficult to apply for a loan if you don’t file a tax return.

Loans such as mortgage, personal or business loan, and higher education loans, will require copies of filed tax returns. Your request will be denied if you don’t have any returns to show.

Serious Collection Activity

If you have unfiled taxes and back taxes, the IRS will be harsh in its collection methods:

  • Tax liens
  • IRS files a Notice of a Public Tax Lien ( the taxes you owe reflect on your credit report and your credit rating will be affected)
  • Wage Garnishment (when the IRS asks your employer to send a portion of your paycheck to the agency to satisfy the taxes owed)
  • Bank Levies (the IRs can ask the banks or financial institutions to levy your bank account)
  • Other Types of Property Seizure

Referred to a 3rd Party Debt Collection Company

If you have tax debts and you don’t file, your taxes will be assessed.

Failure to pay your tax due or going through an agreement with the IRS or with the State,  your account can be referred to a third party collection agency.

Filing tax returns is very crucial. You should file even if you don’t have enough cash to pay your back taxes. You can always get a six-month extension if you can’t file on time.

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Infographics Unfiled Tax

How to File Unfiled Tax Returns

file unfiled tax return

If you missed filing last year’s tax return, then you can file retroactively.  It is always stressful to keep up with the time, but in most cases, you can prepare and submit most state tax returns late.

Failure to file Federal Tax Returns to both the IRS and State leads you to a lot of consequences. Filing a tax return is always in your best interest.

Steps in Filing Unfiled Tax Returns

 

Gather and Keep All Important Documents

Keep the W2’s, 1099’s, and all other necessary forms for the year that you missed filing the return.

If you have itemized deductions, you will need records and receipts to support your claims. If you don’t have those forms, you should contact your employer, former employer, or financial institution. You can get the figures for your wages on your last pay slip of the year.

However, if you cannot gather these documents, call the IRS at 1-800-829-1040 or request for wage and income transcript.

You may acquire 1099 and W2 information even if you don’t have them since the wage and income tax records are kept up to 10 years. If you are self-employed and accomplished 1099-D, the IRS wage and income transcripts will assess your income for a taxable year.

Besides those forms, bank statements may also help determine your income and expenses.

Get All Important Tax Forms

Filing back taxes will require you to use the tax forms for that particular year when you missed out filing. For instance, if you are preparing an individual tax return for 2016, then you need to accomplish Form 1040 for 2016.  You need to use the form for the same year since the rules and credit may change each year.

Old forms can be accessed online. And if you cannot find the one for that particular year, you may contact the IRS or your state’s Department of Revenue. However, there’s a less hassle when you use a software or hire a tax preparer.

Hire a Tax Preparer or Get a Software Program

Getting a tax professional’s help is optional, but this can make filing less cumbersome.

However, if you’re using a software program, you need to use the application for the particular year. You will need to buy a CD or download the software for that particular tax year.

A tax professional will take care of everything. They will find the right tax forms for you. But make sure to consult with the tax professional since some tax forms for a specific year may be unavailable.

Mail Your Tax Returns

Late or old returns cannot be emailed. Otherwise, you need to mail them to the IRS or your state’s revenue department. The address can be found on the tax return or tax return directions. However, if you have a notice telling you to file a return, you should use the address on that IRS letter.

Moreover, if you are working directly with an IRS Revenue Officer, you must address the returns to that particular person. If you’re confused on where to mail the return, you should contact the IRS or state directly.

Other Considerations

When filing old IRS tax returns, the IRS will want you to include the last six years. State tax laws, however, may have some different policies, so you must consult your tax professional (Enrolled Agent, CPA, or attorney).

Take note that filing your return is just a first step to prove the IRS that you already complying to the rules or demands set by the IRS or your respective state. Filing the tax return is also a wise technique to reduce the penalty and to gain the trust of IRS or state representatives who might be open to work with you to settle your tax obligations.

After all, it’s always best to seek a tax professional service when filing tax returns. The tax professional should start with an analysis on your financial condition and investigate on your tax problem(s). Some of the things that must be look into are: current income, assets, expenses, and tax transcripts.

 

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Unfiled Tax

Unfiled Tax Returns: What You Need to Know

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Below are some of the most common questions about unfiled or delinquent tax returns.

How Will I Know If I Need to File a Tax Return?

The IRS introduces Publication 17 each year that provides information on who needs to file. In 2016, those who were required to file were single taxpayers with income above $10,350 and married people (who filed jointly) with income more than $20,700. The threshold is quite higher for older individuals of more than the age of 65.

You must also file if you acquired more than $400 in self-employment income, if you sold a house, or if you have tips or wages that weren’t subject to Medicare or Social Security withholding.

What Will Happen if I Don’t File a Tax Return?

A sheer negligence will lead to a lot of repercussions if you don’t file a tax return.

Failure to file your tax return will prompt the IRS to charge you with 5% of your tax due as a penalty.

The penalty may accrue with the maximum failure to file penalty of 25%. You won’t be allowed for a refund. When you file bankruptcy, you cannot reason out the tax debt unless you are responsible for filing your returns.

The worst that you’ll ever experience is jail time and fines up to $25,000.

My W-2 Documents and 1099s are Missing. What to do?

You must call the business or organization that issued those forms if you accidentally lost or misplaced your W-2s or 1099s. Most companies would secure those forms for at least seven years, so their former employees will have access to those files when needed.

Otherwise, if there’s no success in getting those files, you may request for wage and income transcript(s) from the IRS. These forms can be accessed via IRS online portal.

How Will the IRS Notify Individuals Who Did Not File?

The IRS will mail you notices using the last address they have on file. The initial letters are reminders that you should file and settle your current tax balance.

Eventually, you will receive a notice asking you to file within 30 days—not later than this. If you overlook this initial warning, the IRS will proceed with sending more serious collection notices. After 2 or 3 years, the IRS will file a Substitute for Return (SFR), which means the IRS has already filed for you and will prevent you from getting all necessary exemptions, credits, and deductions.

What is a Substitute for Return (SFR)?

The IRS will complete a Substitute for Return on your behalf if you still neglect your duty of filing a return. However, you won’t be happy when you receive an SFR because this will credit you to a higher tax liability.

Do I Need to File a Return If I Don’t Have Any Tax Debts?

Technically, you don’t have to file a tax return if you are clear from any tax debts. But if you don’t prepare and send in a tax return, you may lose refund and experience some other repercussions.

Can Tax Penalties be Deducted from Tax Return?

No, tax penalties cannot be deducted on your tax return. Meanwhile, interest on tax debt for business taxes can be deductible.

Can You E-File a Late Tax Return?

You can only e-file tax returns that are late up to the maximum of six months after the due date. If you’re way too far behind, you must mail your return.

How Can I Send Late Tax Returns to the IRS?

If possible, you should deliver old returns to your local IRS office and ask for a receipt. If there is no office near you, you can mail the tax return. You will receive a receipt once the IRS receives the return.

However, hiring a tax professional will make is less stressful for you since he or she can do it for you.

Is It Too Late to File? Will I Receive a Refund for Late Returns?

The truth is: it is never too late to file.But you won’t receive a refund for late filing. You should file within three years from the due date to secure the refund.

If I Am Filing a Late IRS Tax Return, Can I Use the Current Year’s Tax Forms?

No, you must use the tax form for the year you are filing the return even you’re already years behind. Most of the old tax returns can be accessed through the IRS website. But if you can’t find the form for the year you are filing, you may ask for the form from the IRS to be mailed to you.

Another alternative is to contact a tax professional and request for a free consultation. Tax professionals are equipped with tax filing software to help you with filing back taxes.

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Categories
Unfiled Tax

IRS Failure to File Penalty: Penalties for Not Filing a Tax Return

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You will be facing the Failure to File Penalty if you overlook your responsibility of filing the required tax returns

The IRS does not tolerate those delinquent taxpayers who do not file their tax returns. The very reason for an unfiled tax return is they don’t have money. 

You should avoid not filing tax returns because you’ll be facing higher penalties than your ordinary tax bill.  You will have more options if you comply or file tax returns on time.

 

What will happen when the IRS charges the Failure to File Penalty?

The IRS will gauge the failure to file penalty (FTF) the first day your tax return is late. One example is when you’re behind your taxes for many years and the federal income tax returns must be submitted on April 15. Once you fail to file, the IRS considers the penalty on April 16th.

You may request for an extension within six months. This extension will help prevent you from having a failure to file penalty. But you need to file only within the extension deadline, which is usually on October 15th.

A failure to pay penalty will be imposed if you don’t pay 90% of your taxes owed at the end of the deadline, which is on April 15.

The failure-to-file penalty is only applicable to those with tax debts. If you don’t have income tax debts, you will avoid this penalty.

The IRS won’t give you this penalty if you comply with your tax responsibilities diligently.

 

Standard Failure to File Penalty

The failure-to-file penalty takes away 5% of your tax liability. For instance, if you owe $5000, then the penalty will be $250, which is assessed the first day when the tax was filed late and the succeeding months until you filed your return. The maximum penalty is 25 percent of your balance, and the IRS will stop the charges when you have maxed out the FTF penalty.

So when you file 60 days late, the IRS charges a minimum failure-to-pay penalty and that is the lesser of $205 or 100% of the tax due.

Note:  If the FTF and the FTP happen within the same month, then the IRS will allow 5% of the total combined penalty.  Therefore, the FTF penalty amount is lowered by the FTP.

 

Failure to File Penalty When there are Negligence and Fraud

If you attempt to deceive the IRS by committing fraud by committing fraud or filing an incorrect return, then you will be facing higher penalties — and that is triple the amount

The monthly penalty will run up to 15% and the maximum penalty is 75% of the total tax debt. The worst that could happen is the delinquent taxpayer will be jailed.

Taxpayers who thought that filing is voluntary and are doing anything to trick the IRS may face Frivolous Tax Return Penalty. The penalty is $5,000 and $10,000 for married people filing jointly.

 

Failure to File Penalty for a Tax Exempt Organization

Tax-exempt organizations with filing requirements that have not filed the required return on the due date will be charged $20 per day the return is late.

The maximum penalty for any return is the lesser of:

  • $10,000
  • 5% of last year’s gross receipt

 

For instance, an organization with gross receipt more than $1 million for the year, the penalty is $100 per day up to a maximum of $50,000. However, if the organization has not been filing tax return for three years straight, it will lose its exempt status.

Failure to File Penalty for Partnerships & S Corporations

The schedule for filing an annual tax return for S corporations and partnerships is on the fifteenth day the third month, following the end of the tax year.

 

A penalty of $195 per month will be charged to each partner for up to a year. So, if a partnership (with four partners ) files three months late, the total penalty will be $2,340 (3 months x 4 partners x $195).

Additional penalties may apply if the partnership fails to furnish Schedule K-1s to its partners.

Failure to File Penalty for Corporations

The FTF penalty for corporations that do not file forms 1120 or 1120-A is almost the same with the usual FTF penalty for individuals.

 

An FTF penalty of 5% for unpaid tax for every month when the tax return is late. This can go up to the maximum of 25 percent.

When you overlook the filing of 941 forms or the Employer’s Quarterly Tax Form, the IRS will assess the Failure to File Penalty of 5% (or could go up to 25 percent)  per month on any tax balance. Form 940, or the Employer’s Annual Federal Unemployment Tax Return (FUTA) is also using the same rule.

 

Removing the Failure-to-File Penalty

If this is the first time you filed late, you may qualify for the First Time Abatement (FTA) program. You may also qualify for penalty abatement if you have reasonable factors that delayed you from filing returns.

 

The IRS allows some reasons and judges each situation on a case by case basis. Below are some valid excuses:

  • The return had been mailed, but the post office returned it because the postage was short
  • Your records or place of business was destroyed in the event of fire, hurricane, and other disasters
  • An IRS employee provided you with incorrect details (this is rare case)
  • Death or serious/terminal illness of a family member (but for corporations, the person who was supposed to file must have the sole authority)

 

If are troubled with your unfiled back taxes and their corresponding penalties, you may consider getting a tax relief professional to help you comply with the IRS and apply for penalty abatement.

 

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