You may have seen the recent headlines announcing that Americans left almost 1.5 billion dollars in unclaimed tax refunds in 2019 because of unfiled tax returns.
That’s a lot of money that will become the property of the U.S. Department of the Treasury when it could have gone back into the hands of about 1.5 million people — had they simply filed their taxes for that year.
Unfortunately, July 17 was the last chance to file for 2019. But if you have unfiled tax returns from other years, I strongly recommend getting those taken care of ASAP (for several reasons that I’ll mention in a second).
Often, we procrastinate because filing taxes seems more overwhelming than it actually is — and sure, it’s intimidating if you try to go at it alone — but if you have a trustworthy someone on your side who is skilled at this sort of thing, it’s really not as bad as it seems.
We would be happy to work through this with you if you have an unresolved tax return or two from the past few years.
Just grab a time here:
But no matter whether you have earned a refund OR owe taxes for any given year… You don’t want unfiled tax returns looming over you because there are some bad things that can happen when you don’t file your taxes…
If you don’t owe taxes
We’re starting on the lighter side here. Even if you don’t owe taxes, there are some negative consequences for not filing.
- You don’t receive a tax refund. If you are due a refund, but you don’t file — simply put, you won’t get the refund. This applies to federal taxes, as well as most states with an income tax. You have three years to file your federal return, but after that, you lose the opportunity to claim your refund.
- Business owners lose out on carrying over losses. When you have business or investment losses, the IRS allows you to carry forward those losses to offset future years’ earnings. If you don’t file a return the year the loss occurs, you cannot carry losses forward from that year.
- You can miss refundable tax credits. If you qualify for a tax credit like the Earned Income Tax Credit (EITC), you have to file a return to claim it. This is a refundable credit, and it puts money in your pocket. If you don’t file, you lose it altogether.
- The IRS might file a return on your behalf… without you (and any mistakes they make will likely NOT be in your favor). In some cases, when you don’t file a tax return, the IRS automatically completes a substitute federal return (SFR) for you. This return contains information from W2s, 1099s, or other forms the IRS has received from your employer, your bank, or other entities. Typically, the SFR only has one exemption, no dependents, and the standard deduction.
If you qualify for more than one exemption, have dependents, or itemize instead of claiming the standard deduction, an IRS-prepared SFR will show a higher tax liability than if you filed yourself. In some cases, you might not have filed because you believed you owed no tax… but under the SFR that the IRS files on your behalf, you actually DO owe tax… and some of the worst consequences (that I will be sharing below) begin to kick in.
- The audit time clock never starts. When you file your tax return, the IRS has three years to audit it. After that, the statute of limitations kicks in, and the agency cannot typically audit that return. However, if the IRS generates an SFR for you, it can be audited at any time. Again, if you file, you avoid the SFR. The IRS usually waits a few years after the due date to complete the SFR.
- You may not qualify to include taxes in a bankruptcy. To qualify for both Chapter 7 and Chapter 13 bankruptcy, you need to be current on your tax filing obligations. In most cases, you must have filed the last two years of returns for Chapter 7 and the last four years of returns for Chapter 13.
- You may have trouble getting loans. If you don’t file a tax return, loans are much more difficult to obtain. Financial institutions generally want to see copies of filed tax returns when you apply for a mortgage, personal loan, business loan, or a loan for higher education.
If you do owe taxes
Of course, there are additional consequences for unfiled tax returns if you end up owing the IRS. Here are a few:
- Special penalties. If you fail to file a Federal tax return by the due date, you face a special “failure-to-file” penalty if you owe taxes. This equates to 5% of the balance for every month you don’t file. The “good” news is that this penalty maxes out at 25%. If you file at least 60 days late, your minimum penalty is the lesser of $435 or 100% of your tax owed.
- Possible incarceration. Jail time is rare — but possible. Under federal law, you can face up to a year in jail and up to $25,000 in fines for not filing your return. The penalties are even stricter if you commit fraud. Fortunately, you cannot go to jail simply for owing taxes. Jail time is typically invoked for not filing or for purposefully evading taxes.
- Publicly posted tax liens. This is when the IRS files a public document called “Notice of a Public Tax Lien.” Consequently, the taxes you owe show up on your credit report. This negatively impacts your credit and puts you in the crosshairs of all kinds of nefarious marketers.
- Wage garnishment. This takes place when the IRS contacts your employer to have wages withheld from your paycheck to satisfy an IRS tax debt.
- Bank levies. The IRS can contact financial institutions or banks you do business with to levy your bank account.
There are a few more things that could happen, but I’ll spare you the especially painful consequences.
I’ve just loaded you with warnings as to why you should file, so now it’s time for the good news:
Emelia Mensa, CPA is here for you — and we are a no-shame, no-judgment zone. You can bring us your pain, mistakes, fears… and we will work it through, step by step, to set you up for success. We simplify the seemingly overwhelming process of sorting out unfiled tax returns, so you can go to bed at night assured that you have a tax-savvy professional working on your behalf.
…And knowing you won’t miss an opportunity like the July 17 one, when scores of people lost out on easy money, simply because the calendar caught up to them.
We exist in order to serve you in this way, and it’s our joy to do so.
Here for you,
Emelia Mensa, CPA