• 29
  • January
    2012

It isn't uncommon for people struggling to make ends meet to claim higher tax exemptions on their paychecks to give them extra cash flow through the year. While the extra income helps them in the short term, many people find that it is often hard to catch up. By the end of the year, many people to end up with IRS tax debt.

The temptation is great for many to avoid filing their taxes altogether. For those who do, it is easy to let one year slide into another and before realizing it, people may not have filed their taxes for several years. There are several reasons why people should not let this cycle continue and why it is important to file your taxes as soon as possible.

It's the Law

The first reason to file your tax returns is that it's the law. You are required to file tax returns.

Even if you owe taxes, it is better to file your taxes than avoid them because the IRS has the ability to fine you for failing to file your taxes in addition to assessing fines for failing to pay the tax you owe. These additional fines can substantially impact the amount of money you owe.

Failure to File Limits Bankruptcy Options

There are statutes of limitation governing the collection of taxes by the IRS. The IRS has three years from when taxes are due to assess taxes and penalties for the tax year in question and 10 years to collect on those taxes. But people cannot rely on that as a reason to avoid filing their tax returns. The clock will not start running on the statutes of limitations until a tax return has been filed.

Perhaps more important are the implications for people considering bankruptcy. In order for personal income taxes to be dischargeable in bankruptcy, they must meet the following requirements:

  • Three years must have passed since the taxes were owed, including extensions
  • 240 days must have passed since the taxes were assessed
  • Two years passed since the tax return was filed.

If this sounds confusing, it can be. A Chicago IRS tax debt lawyer can review your tax situation and discuss your options with you.

Substitute Tax Returns Do Not Substitute for Filing Your Own

Sometimes the IRS will prepare a substitute tax return for an individual when they believe that person has had income for the year. There are two disadvantages to these substitute returns. Not only is the substitute tax return insufficient to start the statute of limitations on collections, but the IRS will also calculate the taxes owed without considering anything that might reduce tax liability such as tax deductions.

Source: www.forbes.com, "File Those Tax Returns," Stephen J. Dunn, 4 January 2012