1. Reduce Your Penalties!

Why file your income tax return if you cannot afford to pay the taxes owed?  The penalties will be the same, right?

Tax Penalty


The IRS assesses a late filing penalty if you fail to file your tax return on time.  This penalty operates like “super-interest”—the IRS will charge 5% of your unpaid tax per month, up to a maximum of 25%.  You will hit the 25% limit if your return is only four (4) months and one (1) day late.

Of course, you will still be assessed a separate penalty for late payment of the tax shown on your return.  This penalty is assessed much more slowly—the IRS will charge 0.5% of your unpaid tax per month, for a maximum of 25%.  But it will take you fifty (50) months to reach this limit.

The bottom line: you can generally reduce your penalties by filing your return on time, even if you have to pay late.

  1. You Must File A Return to Start the Statute of Limitations.


Generally, the IRS cannot audit you more than three years from the date that you file your income tax return.  But, this three-year period does not start running until you actually file your return!  The “substitute return” discussed below does not start the clock for this purpose.

  1. If You Don’t File, the IRS Will.

If you fail to file a tax return, the IRS will kindly prepare a “substitute return” for you.  The substitute return almost always reflects a tax bill that is higher than it should be—in some cases, wildly inflated.  The main reason is that the IRS relies on the taxpayer to report any deductions and exemptions that reduce your tax bill.  If you fail to file a return, the IRS will assess your tax based on the substitute return and then start collection proceedings against you based on what it thinks you know, without having all of the facts available.  You could pay thousands more than you really owe.

  1. No Return, No Refund.

no refund

You may be eligible for a refund—for example, your employer may have withheld more taxes from your income than you actually owe.  But, you will not receive a refund until you file a return.  And if you file your return too late—generally, more than three years after the year in which you overpaid—your refund will be denied.

This is a general overview and not to be confused as legal advice. If you would like to speak to Jonathan about your legal, business or tax matter, please email him at jcw@eastbaybusinesslawyer.com or call him at  (925) 217-3255.