Past Due Tax Returns

Have you delayed filing past years’ tax returns because you didn’t have the money to pay the tax you owed? Have you experienced a major life event, like divorce, medical problems, or loss of employment?  Did not filing your taxes one year lead to not filing them the next and next? Have you become a chronic non-filer because you fear getting caught or being prosecuted criminally?

Why Taxpayers Should File

Avoid Penalties and Interest

The longer you fail to file, the more penalties and interest accrue. Failing to file past due tax returns is a serious matter. The IRS can actually assess penalties both for failing to file your tax return and for failing to pay the amount of taxes you owe in addition to charging interest on the unpaid balance.

Generally, it is much better to timely file your taxes even if you cannot afford to pay them. This is because the failure-to-file penalty is higher than the failure-to-pay penalty. The failure-to-file penalty is typically 5% of the amount of the unpaid taxes for each month or part of a month your tax return remains unfiled. Whereas the failure-to-pay penalty is ½ of 1% of your unpaid taxes each month or part of a month after the date the taxes are due. If both penalties apply in any month, the maximum penalty that will be assessed is 5%. Although the amount for each penalty maxes out at 25% (47.5% for both) of the unpaid taxes, the failure-to-file penalty accumulates much faster. That is a huge difference and makes filing timely extremely important.  

In Maryland, if you do not file a state tax return, they will send you a notice and demand you file one. If you do not respond timely, they will prepare a state tax return for you. The Comptroller of Maryland may assess interest, which is calculated from the time the tax return/payment was originally due, and can charge a penalty for the amount past due as well. If payments continue to go unmade, tax liens can be filed against your property.

Claim a Refund

Also, if you do not file your taxes, you lose out on collecting your tax refund if you are owed one. If you don't file, the IRS or state may file your tax return for you. Typically, this results in the taxpayer owing much more in taxes than if they had filed the returns themselves. The IRS and most states do not include deductions and credits on the return they file on your behalf. Also, if the IRS or state files a tax return on your behalf, you could lose your future tax refunds because the government may offset them to pay past due taxes. Once you refile with your applicable deductions and credits applied, it can drastically reduce the amount you owe. Sometimes, taxpayers are even entitled to a refund and didn’t realize it.

If you are entitled to a refund, typically, you have three years from the original due date to file your tax return to claim your refund. If you do not file your taxes before the statute of limitations expire, you could lose your ability to collect your refund.

What’s even worse than owing back due taxes and penalties: not filing your taxes may be considered a felony for tax evasion.

Start the Clock

Although there is a statute of limitations on collecting your refund, if you are owed one, there is not a statute of limitations on assessment of tax, interest and penalties if you do not file. This means that, if you don't file, you will be always looking over your shoulder because the government can assess against you forever until you start the clock by filing.

Collection Alternatives

If you owe for other tax years, the government will not consider collection alternatives until all your tax returns have been filed. This means you cannot reach an agreement with the IRS or state for reducing your tax liability until you have filed all of your past due tax returns.

Discharging Taxes in Bankruptcy Court

It may be possible to discharge back owed taxes as part of filing bankruptcy. However, you cannot discharge a tax liability in bankruptcy unless you filed a tax return for the tax year you want to be discharged.

If You’re Self-Employed, Protect Your Social Security Benefits

If you are self-employed, you will not receive credit for Social Security benefits until you report your income. This is extremely important for meeting the quarterly contribution requirements and increasing the amount of your Social Security benefits.

Avoid Difficulty Obtaining Financial Assistance

When you apply for financial assistance, many creditors require copies of your tax returns. Whether you are planning to apply for a mortgage to buy a home or refinance your current mortgage, get a loan to start a business, or apply for you or your children for federal aid (FAFSA) for college, it is important to file your tax returns so processing your loan paperwork is not delayed.

If you haven't file past tax returns, it's time to get back in the system, so you can comply going forward. Maryland tax attorney Jim Liang will:

✓ Assist with preparing your tax returns or voluntary disclosures
✓ Seek abatement or waiver of penalties if you qualify
✓ Pursue a payment plan or reduction of taxes owed 

To put past due tax returns behind you, contact the Law Office of Jim Liang for a free consultation.   

Meet Jim Liang

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Jim has over 18 years of experience as a CPA in Maryland, completing state and federal taxes for individuals, families, and businesses. He also has over a decade of legal experience representing clients in audits, collections, and disputes with the IRS and Comptroller of Maryland.

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