Filing late taxes
If you ignored April’s tax-return filing deadline, you may be asking for stiff consequences.
Not only is the Internal Revenue Service facing growing pressure from Congress to do a better job of nabbing those who should be filing returns but haven’t, now President Bush is calling for stiffer financial penalties and longer prison sentences for many who haven’t filed and owe money, effective in January.
Nonfilers cost the Treasury Department about $25 billion a year, the IRS says. Why do so many people fail to file? For many, it’s a severe personal crisis, such as an illness or a divorce. Others claim (erroneously) that there’s no law requiring them to pay federal income tax, or that filing a return is voluntary.
It’s not too late
A few suggestions for those who haven’t yet filed and should have:
• Take action “before the government knocks” on your door, says Charles Rettig, a lawyer in Beverly Hills, California, in an interview in The Wall Street Journal. “The situation is drastically different once the government is involved.” Don’t ignore any notice you receive in the mail; the IRS won’t go away.
• When you do file, be sure to come clean, says Rettig. “It would be unwise to file a delinquent return that is less than accurate,” he says. “That would only serve to compound a possible misdemeanor failure-to-file situation into a felony tax-evasion situation.”
• If you have no hope of ever paying your tax debt, consider filing an “offer in compromise,” which means asking the IRS to accept less than you owe. In 2005, the IRS accepted about 20 percent of the “offers” received and settled for 16 percent of the taxpayer’s liability, according to Business Week.
Some people who don’t file may be eligible for a refund. There’s no penalty for failing to file if you’re entitled to a refund, but generally you have just three years to file for your money back. Otherwise it goes to the U.S. Treasury.
The good news is that millions of taxpayers will benefit this year from the inflation adjustments the IRS is required to make annually. For example, a hypothetical married couple filing jointly with a total taxable income of $100,000 will probably pay $267 less in federal income tax than on the same taxable income last year.
If you’ve already filed your 2006 return, there’s only about a 1 percent chance you will be audited; that chance increases with higher-income taxpayers and the complexity of the return, however.
The Internal Revenue Service conducts two types of audits and both focus only on a couple elements, except under rare circumstances. About 80 percent are correspondence audits that require submission of documents to clarify an item on the return. After receiving the relevant records, the IRS may issue a proposed adjustment to your tax bill, although it can be appealed. The second is called a field, or desk, audit, which requires a meeting with an IRS agent.
The IRS has increased the number of audits on individual returns to 1.3 million in fiscal 2006 from 618,000 in fiscal 2000. Still, 2006 audits came to only about 1 percent of the 132.3 million returns filed in 2005.
An audit notice typically won’t appear for two or three years because of agency backlog.
If the audit is the result of the tax preparer’s mistake, he or she will likely help solve the problem and cover costs. If you prepared your own return, you can hire a CPA, an attorney, or a tax preparer licensed by the Treasury Department to represent you in dealings with the IRS.
A third type of inquiry, not an audit, comes from an IRS computer matching program looking for discrepancies between your return and a third party, such as an employer or bank.
This type of inquiry should arrive within weeks of filing. If taxpayers think the letter is incorrect, they can appeal; otherwise, they can sign off and pay the additional tax and perhaps penalties.
TAX FILING HELP
There’s help available if you’re late or negligent in filing.
www.irs.gov/individuals/index.html or (800) 829-1040 if you know what forms you need.
www.irs.gov to get help on deductions.
www.cch.com or www.ria.thomson.com
(then do a "minimum tax" search) to learn if you’ll be affected by the alternative minimum tax and other inflation adjustments.