If you receive wages, self-employment, social security, a state tax refund or unemployment, interest, investment or other income, chances are you will receive a w-2, or 1099 at year end. If you sell property or stock you will also receive 1099s for the gross proceeds of these transactions.
These documents are the starting point for preparing your tax return. Your age, income and filing status are key determinants in whether you need to file and you also need to file to claim any credits or refund that you may be entitled to.
Information on these same documents finds its way to your IRS file and provides the IRS with enough information to file a return for you if you do not. This file is called the Wage and Income file and the IRS keeps at least the last 10 years of each Taxpayer’s W-2 and 1099 information.
Generally it takes the IRS a year or two to send you a letter saying they do not have a copy of your return for a given tax year and asking you to file.
You may have forgotten to file, so you prepare your return and send it in; you may already have filed, so you send them a copy of your return, or may not be required to file and you send them an explanation.
You ignore the letter from the IRS, what happens next?
The IRS will go back to that Wage and Income file that contains your information, add up all your W-2 and 1099 income and that’s your Gross Income. Then they will figure your Self-employment tax based on the total of the 1099-Misc’s. From there they take the Gross Income and subtract ½ of the Self Employment tax to arrive at Adjusted Gross Income (AGI).
To arrive at Taxable income they take the AGI, subtract the standard deduction for Single or Married filing separately (based on your prior filings), allow you one Exemption and figure the tax at the married filing separately or single rate. Then the IRS applies your withholding taxes or estimated taxes paid.
If you are due a refund… the process stops there but you need to file your own return to get that refund.
Penalties for failing to file taxes
If there is a net balance due they add 5% of the tax due for Failure to File penalty for each month of late filing (max of 25%) plus .5% per month for Failure to Pay penalty for each month you have not paid the tax due (again max of 25%). In addition you may be subject to other penalties for not making sufficient estimated or withholding tax payments.
Then they send you a bill and start the collection process.
Notice anything unusual about the way the IRS prepares unfiled tax returns?
You get an exemption for only yourself, not any dependents.
Taxes are calculated at the highest rate possible, Single or Married Filing Separate Rates not at the lower Head of Household or Married Filing Joint rates to which you may be entitled.
You get no credit for the cost basis of any property, stock or other investments you sold or the expenses you incurred to generate the self-employment income shown on those 1099-Misc.
You get no credit for itemized deductions (medical expenses, mortgage interest, state taxes, charitable contributions etc.).
If you or someone you know have not filed tax returns call Equity Search, tax resolution experts. Our team of tax relief experts, led by Bill Fritton, will guide you thru the process while minimizing the impact on you and your family’s emotional and financial well-being.
Failure to File Taxes happens, We Understand
The above applies to the vast majority of non-filing cases. Most due to forgetfulness, procrastination, lack of money and fear of the unknown etc., where taking the initiative, getting professional assistance and filing your missing return and arranging to pay what is due will resolve the situation. In some cases you may even be due a refund; however, if the returns are not filed within the statute for claiming a refund they will be lost.
Are you going to Jail for not filing your taxes?
In the rare case that the reason for not filing is related to criminal activity, fraud or tax evasion or your case has been referred to the IRS Criminal Investigation Division … then that’s a whole other ballgame and we can refer you to a tax attorney with experience dealing with such situations.