What to do if you haven't filed your income tax returns for the past few years

Why should I file my past due returns now?

There are three good reasons why you should file any unfiled returns as soon as possible:

1. If you owe money, expect to owe even more as the time passes.

According to the IRS, the penalty for failing to file a tax return is 5 percent a month on the balance, up to 25 percent.

And if you file a return but don't make a payment on time, the penalty is 0.5 percent a month on the balance, up to 25 percent.

In addition to the penalties, there is also a possibility that the IRS can prosecute you criminally. If the prosecutors can show that you intentionally didn't file your taxes, you could be charged with a misdemeanor violation punishable with up to a year in prison and a fine of $25,000.


2. There is no statue of limitations on an unfiled return

Even if you don't owe any taxes for the unfiled years, it is a good idea to file anyway. The statue of limitations does not expire on unfiled returns, therefore filing the return would ensure that the IRS closes that year's file for you.


3. You only have three years to claim your refund

While the IRS has the right to come after their money any time on unfiled returns, you only have three years to claim your refund. And why would you want to give the IRS your money anyway?


Can I E-File my past due returns?

Past year's returns cannot be e-filed and the software for preparing the returns yourself may be hard to come by. You'll either have to print the forms from the IRS website and fill them out yourself if you are comfortable doing so, or you'll need to hire a tax preparer to complete them for you. If you are having trouble locating information about your income for the years you are trying to file, you can contact IRS at 1-866-681-4271.

What if I can't afford to pay my past due tax bill?

If you end up owing more than you can afford to pay at the time, you can request an instalment agreement from the IRS. If owe $25,000 or less, you should be able to get an instalment agreement for 60 months. If you owe more than $25,000, you may have to negotiate with the IRS to get an instalment plan. The instalment agreement may sound appealing, however, the interest and penalties continue to accrue while you still owe.

If you have no cash left after paying for living expenses each month, you may want to submit an offer in compromise to the IRS. The IRS may decide to accept a lower amount than what you owe to settle your tax debt. However, this process is not as easy as it sounds and the approval is not guaranteed. You will be asked to submit all kinds of financial information in order for the IRS to make their decision. The downside to submitting an OIC is that if your offer is rejected, the information you gave the IRS about your assets gives the IRS all the information it needs to accelerate its collection efforts against you. Therefore, it you should only submit an OIC if it is likely to be accepted.

Internal Revenue Service (IRS) Email Scam

One of my clients came in the other day with a printed copy of an email he had received from the IRS telling him that he is entitled to a tax refund of $869. The email appears to had come from service@irs.gov. It states the following:

Subject: Get Tax Refund ($869)
From: Internal Revenue Service (service@irs.gov)

The official IRS logo appeared at the top of the email.

After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $869. Please submit the tax refund request and allow us 3-9 days in order to process it.
A refund can be delayed for a variety of reasons.
For example submitting invalid records or applying after the deadline.

To access your tax refund, please click here.

Best Regards,
Tax Refund Department
Internal Revenue Service

Copyright 2009, Internal Revenue Service U.S.A. All rights reserved.

It took me a while to convince him not to click on the link and provide his information. He found it hard to believe that someone could use an email address @irs.gov and not actually be legitimate. I even called the IRS while he was in my office to confirm that they do not send out emails like these to taxpayers.

This email is a scam, and its sole purpose is to get you to click on the link and provide your personal information to thieves who will then either sell it to other thieves or try to steal your identity.

How the New 2009 Stimulus Package will impact you – the individual taxpayer:

Making Work Pay Credit:

Making Work Pay Credit allows a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual’s earned income or $400 ($800 for married couples filing jointly). The credit applies retroactively to the start of 2009 and will be repeated again in 2010.

The credit applies in full for individuals whose modified adjusted gross income (MAGI) does not exceed $75,000 or $150,000 in the case of married couples filing jointly. The credit is phased out a two percent rate above that limit.

Qualified taxpayers would take this credit through a reduction in wage withholding or in a lump sum when filing their returns for the tax years. Earnings from self-employment also qualify to the extent that they are taken into account in computing table income.

Only individuals with the earned income would qualify for Making Work Pay credit, which would effectively offset an individual’s share of FICA of payroll taxes for the first $6,452 in earnings ($12,904 for couples).

$250 Economic Recovery Payment:

The new law provides a one- time payment of $250 –for 2009 only –two individuals and fixed incomes (primarily Social Security recipients, railroad retirees, and disabled veterans). Retired government workers, who generally are ineligible for Social Security, also will receive one time payment of $250. These payments will reduce any Making Work Pay credit to which the individual would otherwise be entitled.

AMT Patch

The new law includes an alternative minimum tax (AMT) PATCH FOR 2009. The AMT patch for 2009 raises exemption amounts slightly above the 2008 patch levels. The 2009 AMT exemption amounts are : $70,950 for joint filers and surviving spouses (up from $69,950 in 2008); and $45,700 for singles and head of households (up from $46,200).

First-Time Homebuyer Tax Credit

The new law raises the current maximum $7,500 first-time homebuyer tax credit to $8,000, and extends it at that level through November 30, 2009. It also eliminates any required repayment to the IRS after 36 months in the home. These enhancements apply to purchases of a principal residence by a first-time homebuyer after December 31, 2008. Purchases on or after April 9, 2008, and before January 1, 2009, continue to be governed by the original first-time homebuyer credit enacted last years. The credit phase-outs that start for taxpayers with AGI in excess of $75,000 ($150,000 for joint files) continue to apply to both years.

New Car Deduction

The new law allows the purchasers of new vehicles for the rest of 2009 an above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase. There are two limits on this new deduction:1) Deductible sales or excise taxes cannot exceed the portion of the tax attributable to the first $49,500 of the purchase price of any one vehicle; and 2) Any deduction will be phased out to the extent the purchaser has adjusted gross income exceeding $125K ($250K for joint returns).

Education Credit

The new law temporarily enhances the existing HOPE education credit – for 2009 and 2010 only – in amount (from a maximum $1,800 to $2,500 per year), in scope (extending it to all four years of college and adding course materials to qualifying expenses), and in phase-out level (to $80K/$160K joint filers). The new law renames the credit the “American Opportunity Tax Credit” and makes 40 percent of the credit refundable. Under the new credit, the maximum $2,500 per year would be allowed on $4,000 in qualifying payments (100 percent of the first $2,000 and 25 percent of the next $2,000).

Child Tax Credit

The new law increases the refundable portion of the child tax credit for 2009 and 2010. The agreement does so by setting the income threshold at $3,000.

Earned Income Tax Credit

The new law provides a temporary increase in Earned Income Tax Credit (EITC) for 2009 and 2010. Prior to this change, the credit percentage for the EITC for a taxpayer with two or more qualifying children was 40 percent of the first $12,570 of earned income. The new law increases the percentage to 45 percent of the first $12,570 of earned income for taxpayers with three or more qualifying children. The EITC phase-out range has also been adjusted upward by $1,880 for joint filers to eliminate any marriage penalty. Eligible individuals may elect to receive advance payment of the EITC from their employers. This is handled through the withholding system.

Unemployment Compensation

Currently, unemployment benefits are included in a recipient’s gross income for federal income tax purposes. The new law temporarily excludes up to $2,400 of unemployment compensation from a recipient’s gross income for 2009.

Transit Benefits Parity

Qualified transportation fringe benefits, such as transit passes, van pooling and qualified parking, are not included in an employee’s income up to specified dollar amounts. The new law increases the current $120 per month income exclusion amount for transit passes and van pooling to $230 per month for 2009 (starting in March 2009), and continues it through 2010 with an inflation adjustment.

Qualified Tuition Programs

Qualified tuition program (aka “529 plan”) distributions used to pay a beneficiary’s qualified education expenses are tax-free. Other distributions are included in the beneficiary’s income and are subject to a penalty. For 2009 and 2010 the new law allows beneficiaries of qualified tuition programs to use tax-free distributions to pay for computers and computer technology, including internet access.