Undoubtedly, as tax day approaches, there are people right now who are struggling with the question: “I haven’t filed in [fill in the blank]____ years. Should I file this year?” As a tax and bankruptcy lawyer serving individuals and businesses in Maryland and DC, this law firm is very familiar with this taxpayer’s quandary.
On the whole, it’s better to file — even if you can’t pay — for a number of reasons:
• IRS, and the state tax authority, make a distinction when it comes to charging you with civil tax infractions. There are a separate set of penalties added to your tax bill for “failure to file” and “failure to pay.” Go ahead and file, at least. You’ll save yourself some money in penalties.
• If you can’t pay the tax bill all at once, you can always ask for an installment agreement to pay over time. For tax debts of $25,000 or less in combined tax, penalties, and interest, you are virtually guaranteed an installment plan and at a monthly payment you propose and can afford. Note that you will still be accruing interest and penalties so that the tax debt grows at about a 25% rate. You will need to make a large payment to actually pay down the tax bill. Don’t end up like a lot of the taxpayers who come into our office and lament: “We’ve been paying IRS for several years now, and it’s not going down!” Otherwise, at most, you are buying time.
• If you can’t pay at all, you can always ask to be placed in “uncollectible status.” However, if successful, that only forestalls the day of reckoning. Eventually, it’s hoped, you will be earning more, and when that happens the taxman will see it from W-2s sent to the agency, and he will come a-knocking for what’s owed.
• Three years from now, if you’re still in a financial fix, you can completely discharge the tax debt in a bankruptcy. One of the key requirements to discharge a tax debt is that you must have filed a tax return for that tax year more than TWO years before the bankruptcy filing. The two-year rule for tax returns causes a serious problem for serial non-filers. We often see taxpayers who have not filed for many years who now want to resolve the back tax problem. We can help them to freeze the last three years of taxes from growing and pay them off in a Chapter 13 bankruptcy, but there is no discharge, unfortunately, for the other years. There are solutions, but it’s much more complicated, expensive and uncertain.
There’s a saying you’ve surely heard before, but it is very, very true: Nothing’s as certain as death and taxes. If you have a social security number, IRS knows where you work, have bank accounts or maintain investments. Eventually, IRS will prepare a taxreturn for you, but with minimal, if any, deductions such that your tax bill will be much larger than if you prepared it yourself. Also, before IRS or the bankruptcy court considers tax relief in your case, you will have to get all the missing tax returns prepared and filed. So, why wait? Just get it done.