Why You Should File Your Delinquent Income Tax Returns
COVID Tax Tip 2020-77, recently issued by the Internal Revenue Service, gives reasons why taxpayers should file a 2019 income tax return. Each reason involves recovery of money from the U.S. Treasury. If you had Federal income tax withheld from your wages in 2019, or if you paid estimated Federal income tax, you may be entitled to a tax refund. You must file a 2019 income tax return to claim the refund.
There are several refundable credits. These will be paid to the taxpayer in cash to the extent they exceed the taxpayer’s tax for the year. But the taxpayer must file a tax return to claim the credits. Refundable credits include the Earned Income Credit, the child tax credit, and American Opportunity or Lifetime Earning Credits.
Taxpayers are entitled to an Economic Impact Payment of $1,200, or $2,400 on a joint income tax return. They need to file a 2019 Federal income tax return to claim the payment.
There are other reasons, not mentioned in COVID Tax Tip 2020-77, for a taxpayer to file delinquent income tax returns. The statute of limitations on assessment of tax with respect to a given year is three years, and it begins to run upon filing of the tax return for that year. The assessment statute is six years if the tax return understates gross income by more than 25 percent, or if the tax return understates gross income by more than $5,000 attributable to foreign financial accounts. There is no assessment statute of limitations as to a fraudulent tax return. The point is that the assessment statute of limitations never begins to run with respect to an income tax return that is not filed.
The collection statute of limitations with respect to tax for a given year is ten years, and it begins to run when the tax return for that year is filed. Collection action the IRS might take includes filing of lien notices against the taxpayer and recording them in the local register of deeds’ office, and levying (seizing) the taxpayer’s wages or property. The point is that the collection statute of limitations never begins to run as to an income tax return that is not filed.
The IRS will not resolve pending collection action against a taxpayer, by means of an installment agreement, an offer in compromise, or currently not collectible posting, unless all income tax returns due from the taxpayer have been filed.
Bankruptcy is often advisable for dealing with outstanding tax balances. However, income tax for a given year is not dischargeable in bankruptcy until the return for that tax has been filed for at least three years.
Finally, a taxpayer who owes tax for a given year and fails to file a return of the tax is guilty of a misdemeanor punishable by fine of not more than $25,000 or imprisonment of not more than one year or both. Thus, by fling delinquent income tax returns a taxpayer can avoid a potential criminal prosecution.
In sum, a taxpayer owing delinquent income tax returns should file them as soon as possible.