Sometimes the world is just too much to deal with. When someone fails to file an income tax return in a timely manner, it seems easier to not file the next year, and the year after that.
Then when IRS contacts you, the questions are, “Will they put me in jail for not filing?” and “How much will it cost for interest and penalties?”
IRS just wants you to be and stay in compliance. IRS wants you to pay what is owed and will usually agree to an Installment Payment Agreement that gives you several years to make monthly payments and get the old debt paid. They realize if you go to jail, it is very hard to earn enough to pay off the old debts. It is better for you and IRS for you to work and pay everything off. Some penalties can be cancelled for reasonable cause, but you will probably have to pay the interest.
The Installment Payment Agreement will require you to file timely in the future and pay the taxes timely. It is sort of like “if you are in a hole, the first thing to do is stop digging, stop making the problem worse.”
If you had income tax withheld or you paid estimated tax for a year that is more than three years back, IRS does not pay any refunds. We have seen instances when the refund was fairly large, but the taxpayer did not receive it because they did not file the return within the last three years.
The main communication is you are not likely to be sent to jail for not filing several years income tax returns if you start working on getting all back years returns filed.
If your business had losses, sometimes there is a Net Operating Loss (NOL) that can be used to reduce taxes in other years. The basic rule is a loss in 2014 carries back two years to 2012. If not all of the loss is used in 2012, the balance goes to offset income in 2013. If the loss is more than those two years needed to zero out your income tax, the excess NOL carries forward to 2015 and later years.
There is an election that can be made to decline the carryback of an NOL and have it only apply to future years. Sometimes that is the best answer to save the most income taxes.
Unfortunately, the self employment tax (FICA and Medicare) on business profits of a sole owner or partner is not reduced because of an NOL. It is not unusual to see the income tax is zero, but the self employment tax must still be paid.
If you know of someone that has not filed a few or many income tax returns, suggest they get help and file those returns as soon as possible. With the various tax elections and choices about depreciation expense for equipment, etc., the amount of tax may be much less than they guessed.
Did you hear? “Our struggles in this world are similar and the lessons to overcome those struggles and to move forward-changing ourselves and the world around us-will apply equally to all,” Admiral William McRaven
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.