The IRS has announced that it is holding funds, totaling more than $1 billion, that are awaiting a claim from the more than one million people who did not file a federal income tax return in 2008. In order to collect their refund, taxpayers who have not yet done so must file an income tax return for 2008, no later than Tuesday, April 17, 2012.
While this announcement from the IRS is certainly informative, like most statements from the tax collector, it must be taken with a grain of salt. In the release, the IRS is quick to point out that there is no penalty for filing a late return, when that return qualifies for a refund. However, what goes unmentioned is that late filers whose returns do not show a refund will be quickly assessed past due taxes, along with the requisite interest, and hefty penalties for failure to file and pay. The IRS does “remind taxpayers seeking a 2008 refund that their checks may be held if they have not filed tax returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past due federal debts such as student loans.”
People often wonder whether they should file their federal income tax returns if they think that they do not owe anything or if they do not have the money to pay the taxes that are due. Usually, it is a good idea to file the return in both of these instances. This is because there are benefits to filing your return, even if you cannot pay the taxes, as it can help to avoid penalties (such as the aforementioned “failure to file” penalty) and can also begin running the statute of limitations.
While it is usually a good idea to file a late tax return, especially if the IRS is holding on to your money, as with most things tax-related, there is also a strategy about how best to go about getting it accomplished. First, consult with your tax professional to determine how the IRS will react when you submit the return. Otherwise, taxpayers may find themselves fighting against the proverbial quicksand, as what was once a small (or even nonexistent) issue can begin to widen and suck them down. Many tax practitioners are painfully aware of the consequences of ending up on the “wrong side” of the IRS and its computer system, which can quickly begin to overwhelm an unprepared taxpayer with alarming notices the moment it determines that money is owed.
Getting on the “good side” of the IRS often requires that the taxpayer who has failed to file in the past go back and submit their late returns. Sometimes, the outcome can be a pleasant one, such as finding out about money that you did not even know you had coming. However, even if this is not the case, it never hurts to know and understand what is coming, especially if it includes the full force of the U.S. Government.