Top Five Reasons People Don't People File Their Taxes

To File or Not to File . . .

Been out of the system for a while and want to get back in?

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Almost everyone who is not a criminal usually thinks it’s a pretty good idea to to comply with federal and state tax laws. After all, as I remind my clients when they suggest otherwise: The Feds have nuclear weapons; and the States have the National Guard. What do you have?

But unfortunately a lot of us don’t file our income tax returns. Well, not me, I’m a CPA! There plenty of reasons people don’t file their income tax or GET tax returns in Hawaii. But at least 80% of the clients I prepare back tax returns for here on Maui fall into five general categories. In this post we discuss the most common reasons taxpayers give for not having filed for a year or two…or three. Or six. Or more.

The IRS estimates that 95% of us file; but that still leaves about seven million folks to keep you company if you haven’t filed this year. Or last. Or…

So why don’t people file their taxes?

TOP 5 REASONS FOR NOT FILING TAX RETURNS

ILLNESS - I hear this one a lot. And while it sounds like a pretty good excuse to me, the IRS and HI Tax don’t generally make allowances for illness. Occasionally, tax agencies will erase penalties if your story is particularly compelling.

INABILITY TO PAY - While it’s understandable that people avoid filing tax returns because they can’t pay the taxes due, this is one of the worst mistakes you can make. To be absolutely clear, it is much better to file a return and not pay, than not file a return at all. Late filing penalties alone can add 25% percent to your tax bill - in addition to other penalties involved in filing late. So even if you can’t pay the tax owed, file a tax return. Generally speaking the IRS will not attempt to collect after 10 years have passed in cases of negligence, understatement of tax, or non-filing. However, this ten year period doesn’t begin until you file the tax return in question. As such you are technically at least liable for the unpaid taxes for rest of your life. When considering … 10 years to life . . . most of us opt for 10. Not that you’re going to prison. More about this in my post on appropriate and counterproductive fear of the IRS.

DIVORCE - When couples divorce after having been filing joint tax returns during the marriage very often one spouse neglects filing taxes in the subsequent year(s). Similar to illness, this one is great excuse but the taxing agencies are only interested in your money - not your personal problems. In most marriages one spouse generally handles the tax return chores. If that was not you, remember: If you have income, you (generally) need to file a tax return. In another post we’ll discuss the IRS Innocent Spouse Relief program.

UNAWARE OF FILING REQUIREMENTS - Some taxpayers don’t know they are required to file a return, particularly if they don’t generally file one. I have clients who are liable for taxes as a result of asset sales or other non-recurring income who neglect to file because they are unaware of their obligations. Once again, understandable, but not filing tax returns has no known acceptable reason other than death. And EVEN THEN . . . your heirs generally have to arrange to file a final return for you. Yes, even after you’re dead the IRS wants your tax returns and your back tax returns.

SIMPLE UNWILLINGNESS - Some people get away with not filing for a long time. And then they begin to get letters. It’s worth repeating this if you fall into this category: If you don’t ever file a required return, you are potentially liable for unpaid taxes for decades. Many of us don’t exactly know how to approach getting back into the system and getting squared away with the IRS and/or State Tax authorities. I discuss “getting back into the tax system” in this blog post.

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A lot of CPAs are reluctant to work with “non-compliant” taxpayers. People who have had problems filing or paying their taxes in past years form an important part of my practice.