Don’t be scared of the tax man

Dear Bonnie: I hate to admit this but I haven’t filed taxes in more than 20 years. What’s even weirder is that I haven’t heard anything from the IRS about it. I have moved around quite a bit, so maybe they haven’t been able to keep up with me. And I didn’t really make very much money so maybe I’m just too small of a fish for them. I dunno. Thing is, I’m hoping to get married soon but my fiancé told me she wasn’t going to marry me until I settled up my tax situation. Okay, here comes the hard part – if I start filing taxes now are they going to see that I should have been filing all along and throw me in jail for not filing?

– Anonymous, Grass Valley

Dear Anonymous: I understand where you’re coming from. After all, you hear all the stories. From Leona Helmsley to Willie Nelson to Wesley Snipes and all the ones in between who suffered jail time and heavy fines for underreporting, not reporting, inaccurate reporting. It’s enough to instill the fear of the Tax Man in anyone’s gut. And that’s just what they want to do; after all, fear increases the compliance level.

I have yet to see one client land in jail. An IRS auditor once told me, “We really don’t want to put anyone behind bars. It’s more beneficial if taxpayers are out there working and bringing us revenue.”

And believe me, over the years, I’ve dealt with many clients who hadn’t filed in more than 20 years, or who have filed but haven’t paid for almost as long or who are audited and the tax return reads like a fiction novel. In one situation, an auditor told me, “We were thinking about bringing in CID (Criminal Investigation Division) but if you compile the books and file an accurate return, I’ll let it go.” And she did.

So my point is, don’t be scared. There is a safe resolution. You might want to consider calling them or hiring a tax pro to make the call for you. You might be surprised to find that they in fact have not been looking for you. If you haven’t made too much money, maybe you will end up with refunds instead of a tax bill. Keep in mind that if you are filing for tax years that are closed – the three year refund window has lapsed – you will not receive a refund. For example, if you are now filing your 2008 income tax return due April 15, 1009, and you had not gotten an extension to October 15, 2009, you will lose any refund reflected on the tax return.

But if you owe, you will be expected to pay. Putting your head in the sand can prove deadly when it comes to a balance owing. Please don’t wait until you hit your ATM one day only to find that the IRS has seized your bank balance. It’s better to talk to them to see what can be done if you are having trouble paying. You may be automatically deemed uncollectible if you are unemployed. That will buy you a year to get it together before having to set up a repayment plan. Even if you are employed, you may still be deemed uncollectible if you are otherwise in dire straits – spouse left you with many mouths to feed, health issues, etc. The IRS may suggest you file for an Offer in Compromise in which you can negotiate to pay less than the balance due. Or they may be willing to set up a payment plan. There are better alternatives to running scared.

When it comes to filing back taxes, you may be concerned that you do not have all of your records. The good news is that the IRS has copies of all third party documents you may be missing –W2s, 1099s, K-1s, 1098 (Mortgage interest), etc. You can get a transcript of this information then fill in the blanks from your other records.

If you have a tax question you would like answered, write to [email protected]