If you are placed in the less than enviable position of either not filing your taxes or filing your taxes late, there are a few things you should know:
- If you receive a tax bill from the IRS, respond to it. Even if you don’t have the money to pay the bill in full, contact the IRS and make payment arrangements.
- The IRS may request that you take a loan or mortgage your property in order to pay your taxes. This could be avoided if you contact them and make an arrangement.
- If the situation is allowed to progress, the IRS may levy your wages, bank accounts or put a federal lien on your property. These are usually actions of last resort and can be avoided if you contact the IRS to make payment arrangements.
If the government becomes aware of the fact that you didn’t file your taxes, they will calculate and file a tax return for you. The IRS calls it a substitute return. You can bet that an IRS calculated tax return will result in a higher tax bill than if you filed your taxes yourself.
The IRS is not going to take the time to itemize your deductions. They’re basing their substitute return on the information sent to them by your employer and banking institutions. Therefore, they base their returns on half of your tax profile. They did not include your child care deductions or job hunting expenses. Even if you don’t have the money to send along with the past due or overdue tax forms, file your taxes.
If you allow the government to file a substitute return, they will then begin procedures to collect the monies they believe are due. As stated above, if you do not respond, they can levy your wages and issue a Notice of Federal Lien on your assets. This could be avoided by filing your taxes and contacting the IRS to make payment arrangements.
If you’re filing your taxes late and you owe money, you will be penalized by both interest and fees on the balance due. The interest and fees begin to accrue from the date on which the taxes should have been filed. For example, if you did not file your taxes for tax year ending 12/31/2001, your interest will begin to accrue as of 4/15/2002.
If you have a large tax liability, you can set up an installment agreement to pay the outstanding taxes. Keep in mind that in order to set up an installment agreement, you must have filed your taxes for every outstanding year.
You should note that setting up an installment agreement will stop the collection process, but it does not stop the interest. The government will continue to charge interest on the outstanding balance due. The rate of interest is a hefty one, so you might be better off getting a bank loan to pay the outstanding debt.