Looking To Get Back In The Good Graces Of The IRS – Filing Taxes Late? Act Now And File Back Taxes
Getting right with Uncle Sam is dreaded by most. After all, who wants to pay taxes? Nevertheless, as U.S. citizens and taxpayers, we understand that paying taxes is a legal obligation, albeit one that we are not fond of. At Tax Samaritan, we find that most taxpayers that are behind in filing taxes and are contemplating filing taxes late desperately want to know how to get back into the good graces of the IRS without getting hit with exorbitant taxes, penalties and interest.
Filing taxes late, especially with a tax liability, will often result in penalties and interest that have been incurred since the due date of the return. However, many taxpayers, especially those that are overseas, may not have any tax liability at all. The good news is that, if there is zero tax liability, there are no late penalties and interest either. There is no escaping the need to file a return, but filing sooner rather than later will lessen your potential exposure, including the risk that you may lose the right to claim important tax benefits such as the foreign earned income exclusion, and may even result in a pleasant surprise.
Why Do Taxpayers File Late?
Most taxpayers are well aware of the standard tax filing deadline. Nonetheless, many taxpayers still fail to file their returns on time. Below are some of the most common reasons taxpayers file their returns late:
- Thinking a return isn’t required. The rules surrounding filing requirements can be complicated, especially for taxpayers living abroad. In some cases, taxpayers fail to file a tax return on time because they misunderstood the rules and did not believe a return was required.
- Not being aware of the filing deadline. Most people know when the usual filing deadline will occur each year. However, with special rules and exceptions, automatic extensions, and unique deadlines for special filing circumstances can get confusing. If a taxpayer believes he or she has more time to file, the taxpayer may miss the actual deadline.
- Lack of information required to file the return. Before you can file your tax return, you need specific information about the income you earned during the year, as well as some of the expenses you paid. Taxpayers who don’t receive this information in time to prepare their returns may miss the filing deadline. In most cases, this information is not received because an employer or another party failed to uphold their own responsibilities under the law.
- Tragedies. Some taxpayers may be unable to file their tax returns on time because they have experienced some type of tragedy, such as a natural disaster, death in the family, or other unexpected event. These events can make it impossible for the taxpayer to prepare and submit the return on time. In these cases, penalty relief may be available.
- Delivery issues. Some taxpayers fail to file their returns on time because they attempted to submit the return but it was never received. For example, if a paper return is lost in the mail, a taxpayer’s return could be considered late. For this reason, it is important for taxpayers to obtain proof of delivery when submitting a tax return.
- Procrastination. In other cases, taxpayers fail to file in a timely manner because they procrastinated and were not able to finish the return on time. To avoid this issue, taxpayers should begin working on their tax returns as soon as the required information becomes available.
- Lack of assistance. Filing tax returns can be complicated for everyone, especially people living abroad. If a taxpayer is confused about the preparation of the return and does not have assistance from a reliable party, he or she may miss the filing deadline.
- Fear. When a taxpayer knows that he or she cannot afford to pay an owed balance, he or she may be afraid to file the associated tax return. However, it is important to note that not filing the return will only make matters worse by adding to the penalties you owe. The penalties for failing to file a timely return is ten times higher than the penalties assessed for failing to pay a tax liability on time, so filing on time even if you are unable to pay the tax liability can be very beneficial.
Penalties for Late Filing
For most taxpayers, including those who are living and working overseas, the annual deadline for filing a tax return is April 15. Those residing overseas on the regular due date of the return are granted an automatic two-month extension to June 15.
If you don’t file by this date and you are required to file a tax return under the current laws, you may owe a failure-to-file penalty. You will also owe a failure-to-pay penalty for any taxes you fail to pay by the regular filing deadline of April 15 (it’s important to note that there is no extension to pay; only an extension to file your return).
Some taxpayers mistakenly believe that if they don’t file their tax return when they aren’t able to pay the associated tax debt, they won’t incur as many penalties. However, failing to file your return will not save you any money. In all cases, the failure-to-file penalty will be more than the failure-to-pay penalty (ten times more, in fact). Thus, you should always file your tax returns on time even if you are not able to pay what you owe immediately. Filing on time can reduce your interest and penalties considerably.
The penalty for failing to file your tax return on time is typically equal to five percent of your unpaid tax balance for every month or portion of a month that the return remains unfiled. The IRS will begin calculating this penalty from the day after your tax filing due date.
Why Should I File Now?
Failing to file your required tax returns won’t help you avoid penalties if you have a tax liability, even if you can’t pay what you owe in full at the time. In fact, as we have just discussed, failing to file will only add to the penalties and interest you owe. In addition to avoiding interest and penalties, there are other benefits to filing your delinquent tax returns as soon as possible. These benefits include:
- Claiming a refund. Some taxpayers who don’t file, risk losing a refund they were entitled to receive from the IRS. If you are entitled to a refund for estimated taxes you paid, withheld taxes, and/or tax credits, you have only a limited amount of time to claim it. If you do not file your return within three years of its due date, you will forfeit your right to the refund.
- Avoiding issues with mortgage loans. If you are applying for a mortgage, you may experience delays because of unfiled tax returns. Most financial institutions that offer loans will request directly from the IRS, transcripts that show proof of filing. If a return has not been filed, it is likely a loan will be denied. You will also have similar problems if you try to apply for federal student aid with past due tax returns.
- Protecting social security benefits. Self-employed taxpayers who fail to file requires federal income tax returns won’t receive credits toward social security retirement benefits or disability benefits because self-employment income won’t be reported.
- Avoiding a substitute return. If you don’t file a required tax return and the IRS becomes aware of your delinquency, the IRS may file a substitute return on your behalf. This return may not give you credit for any exemptions, deductions, or tax credits that you could have claimed if you had filed the return on your own, thus leading to a higher tax bill.If the substitute return the IRS prepares determines that you owe taxes, you will receive a Notice of Deficiency in the mail, which will give you 90 days to file your past due return or file a petition. If you don’t take action after receiving your tax bill, the IRS will begin the collections process. The IRS has considerable power with regard to collections and may file a Notice of Federal Tax Lien, remove money from your bank account, and/or garnish your paycheck.
Filing for an Extension
If you know you won’t be able to file your tax return on time, you may be able to avoid penalties by filing for an extension. Filing for an extension will automatically move your tax filing deadline, which can protect you from expensive failure-to-file penalties.
Filing for an extension will move your tax filing deadline six months into the future. For most taxpayers, this means your deadline will be October 15. Keep in mind that an extension on your filing deadline is not the same as an extension on your payment deadline. You will still be expected to pay your tax balance before your original filing deadline, even if you don’t actually file your return until much later. In most cases, you will be able to avoid failure-to-pay penalties, if you pay at least 90 percent of your tax balance by your original deadline.
What Will My Penalty Be?
The exact penalty you will owe if you fail to file your tax returns on time will vary based on your situation. Penalties are calculated based on your outstanding tax balance. If you are entitled to a refund or your tax balance is zero, you will not owe any penalty for failing to file your tax return on time, even if you didn’t request an extension. Nonetheless, because you may be entitled to a refund, you should still file your tax return on time even if you don’t think you will owe a balance. In addition, the statute of limitations on the IRS’ ability to audit your return won’t begin until you file it.
If you have a balance due, your penalty for failing to file will be calculated based on this amount, as well as the length of time that has passed since your filing deadline.
It is important to note that the IRS statute of limitations for assessing taxes never expires if you have not filed a tax return for any tax year.
Waiving a Late Filing Penalty
If a failure-to-file penalty has been assessed against you, you may qualify to have the penalty waived in specific circumstances. For example, some taxpayers are able to qualify for relief under the IRS’ First Time Penalty Abatement policy, which waives penalties for taxpayers who meet specific requirements. In order to qualify to have failure-to-file penalties waived under this policy, you must have already made arrangements to pay any of the tax you owe, or you must have already submitted the payment. You must have also filed all of your required tax returns or filed an extension, and you must not have incurred any other penalties during the three tax years prior to the year in which you received the penalties in question.
Even if you do not require for penalty relief under the IRS’ First Time Penalty Abatement policy, you may still be able to have your failure-to-file penalties waived if you can show that you have an acceptable reason for failing to file your tax return on time. For example, if you can show that a natural disaster prevented you from filing a return, you may qualify to have the associated penalties waived.
How Do I File Past Due Returns?
Regardless of your circumstances, it is always in your best interest to file past due tax returns. In most cases, you will be able to file your delinquent return in the same way as you would have filed a return submitted before the required deadline. However, if you have already received a notice from the IRS, you should follow the instructions included on the notice when you file the past due tax return. Once submitted, it may take up to six weeks for the IRS to process a completed past due tax return.
Can I Still Claim Credits and Deductions?
If you are filing your tax returns late, you may wonder if you can still qualify for credits and deductions available from the IRS. In some cases, you will still be able to claim these tax benefits. However, in other cases, you may not be able to.
For taxpayers that are filing taxes late for tax years where they were overseas, the foreign earned income exclusion (if qualified) may eliminate a large portion of any tax liability, as any portion of foreign income eligible for the exclusion is excluded from taxation. However, this exclusion is only available if it is elected (“claimed”) on a tax return, and the election must be timely. Often, this means that the election must be made before the IRS has begun collection activity or before IRS notification to obtain back tax returns that have not been filed. Thus, it is important for overseas taxpayers to file any delinquent returns as soon as possible in order to be able to take advantage of these important tax benefits.
What If I Can’t Pay What I Owe?
We have already established that you should still file your tax returns even if you owe the IRS a balance you cannot currently pay. If you don’t file, you will face expensive failure-to-file penalties. However, you may wonder what you should do about the balance you owe.
If you find yourself in this situation, you have several options. Some of these options include:
Some taxpayers are able to pay the debts they owe by combining various methods of credit. For example, you may use credit card cash advances, personal loans, or home equity loans to cover the balance. However, it is important to note that you will likely pay interest on the amount you borrow to pay your tax bill and the interest that you pay will likely exceed the interest charged by the IRS for an Installment Agreement.
Some taxpayers are unable to pay their full tax bill immediately but would be able to afford it with a payment plan. Fortunately, the IRS often allows taxpayers to pay their debts in installments over time.
In order to apply for an installment agreement, a Form 9465, “Installment Agreement Request must be submitted to the IRS.
If your application is approved, you will be able to pay your tax debt in monthly installments until your balance is zero. If the amount owed is less than $10,000 and the payment plan you propose lasts for no more than three years, you won’t have to provide any information about your financial situation. However, if you owe more than $10,000, or if you want a longer installment plan, you may need to provide documentation related to your liabilities, assets, and income before the IRS will consider your request.
Keep in mind that installment agreements are not free. The IRS charges taxpayers a fee to set up an installment agreement. This fee will depend on your financial situation, as well as whether you must pay your installments through direct debit. You will also have to pay interest and penalties that can add up considerably. Although the overall interest rate will likely be lower than your credit card, it may be higher than a home equity loan.
Offers in Compromise
In some cases, you may be able to negotiate the debt you owe to the IRS. This is known as an “offer in compromise”. If you qualify for an offer in compromise, you will be able to settle your tax debt for less than the full amount you owe. However, it can be difficult to qualify for this option.
In general, the IRS will agree to an offer in compromise only if one of the following situations applies:
- You are unable to pay the amount of tax assessed against you without suffering severe economic hardship or some other extreme circumstance.
- You may never be able to pay the full amount of tax you owe.
- There are doubts about the accuracy of the debt assessed against you.
To apply for an offer in compromise, you must complete Form 656, “Offer in Compromise Package.” This package includes several forms that collect information about your income and assets. Even after receiving these forms, the IRS may request additional documentation before making a decision. In addition to reducing the total amount you pay, an offer in compromise can also be used to stretch your payments over several months or years.
Keep in mind that defaulting on an offer in compromise is a serious offense that may lead to a lawsuit against you, as well as a reinstatement of the original debt.
Payment Deadline Extensions
In some cases, you may simply need a longer amount of time to pay the tax you owe. You can request an extension on your payment deadline by filing Form 1127: Application for Extension of Time for Payment of Tax . However, qualifying for this type of extension can be tricky, as the legal requirements are strict. In order to qualify for a payment deadline extension:
- The IRS must receive Form 1127 on or before the original payment due date.
- You must provide detailed information about your finances, including a statement of your assets and liabilities and a detailed record of your cash flow for the last three months.
- You must show that you would experience undue hardship if you were forced to pay the tax now.
- You must show that you would not be able to raise the money you need by borrowing it, selling property, or any other reasonable method.
If your extension is approved, you will likely have no more than six additional months to pay your tax bill. Before granting the extension, the IRS will require you to provide some form of security, such as a bond.
What about Delinquent FBARs?
For taxpayers who live and work overseas, the situation can be more complicated. In addition to filing annual income tax returns, expat taxpayers must often file the Foreign Bank Account Report, or FBAR.
The purpose of this form is to disclose the existence of foreign financial accounts held overseas. This form is required on an annual basis, even when the accounts in question have not generated any taxable income during the year.
The U.S. government has a bias that the purpose of foreign accounts is a tool for tax evasion and criminal activity; even though for the vast majority of taxpayers this is not the case. Thus, if you fail to file an FBAR that was required by law, you may face both civil and criminal penalties, depending on the specifics of the situation. These penalties can be exorbitant for some taxpayers, so it is important to take action immediately if you have failed to file one of these documents on time.
Even in these complex situations, there are still options available to potentially lessen your risk and exposure. This includes options such as the Streamlined Foreign and Domestic Offshore Disclosure Procedures that are available to help U.S. taxpayers correct past tax returns and rectify late FBAR disclosures. The disclosure program is not right for everyone, but we can help with providing the needed advice and guidance so that you can make the best decision for filing taxes late and FBARs based on the details of your situation, along with professional tax and legal advice.
But, to get the relief you need and deserve, action must be taken. The sooner you act, the better. If you have foreign financial accounts, foreign banks and financial institutions have already begun sharing U.S. citizen held accounts to the IRS under FATCA. Hiding or procrastinating is no longer be an option, and the voluntary disclosure option is only available before the IRS discovers that you have an offshore account. At that point, the disclosure program will be one less option available for your tax resolution.
At Tax Samaritan, we are experts in filing taxes late and getting taxpayers caught up and back into compliance with the IRS. With Tax Samaritan, your late tax returns are prepared in an efficient and streamlined manner, so that you can quickly get tax relief and get back to more important matters in your life.
Getting Help with Past Due Tax Returns
If you have one or more past due tax returns that needs to be submitted to the IRS, you are likely feeling overwhelmed. If you have other documents that need to be submitted, such as FBARs, the situation is even more complicated.
However, in order to minimize the penalties you owe and avoid other potentially serious consequences, you need to take action to rectify the situation as soon as possible.
If you are not sure how to proceed, you need to contact an experienced tax professional for assistance. At Tax Samaritan, we have decades of experience helping expats file delinquent tax returns, pay their outstanding balances, and get right with the IRS with as little expense and discomfort as possible. With our help, you can resolve all of your issues with the IRS and enjoy the relief and freedom that comes with knowing you are back in compliance.
The experts at Tax Samaritan know how to deal with virtually any situation involving delinquent expat taxes or unfiled tax returns. When you trust us to handle your tax returns, we will begin by assessing the situation so we can give you customized advice. We will assist you in the preparation and submission of all back tax returns. We can also help you apply for any penalty abatement or other tax debt relief you may qualify to receive. Throughout the process, we will communicate with the IRS on your behalf and make sure your best interests are always served.
Get Started With A Tax Quote
Tax Samaritan is focused on ensuring that accurate and complete returns are prepared for all taxpayers while paying the lowest tax liability legally possible.
If you would like to discuss filing taxes late and about your options to prepare your back taxes, you can request a free, no obligation quote for our services here:
And a free, no obligation 30-minute consultation is included. During this consultation, we will be happy to answer any specific tax questions that you have regarding your personal situation.
Or you can call us directly at 702-350-1040.
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents and CPAs. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional.
When looking for a tax professional, remember to choose carefully. We recommend that you generally want to hire an Enrolled Agent, such as Tax Samaritan or other professional licensed to practice before the IRS, such as a CPA or attorney. If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation (most tax professionals have limited to no experience with expat taxes). Below are a few links to additional tips on finding the best tax professional for you: