I haven’t filed my taxes…now what?

Ben (00:06):

Welcome back to the Retirement Tax Podcast. I’m your humble cohost as always, Benjamin Brent joining me, Steven Jarvis. How are you doing today? Steven?

Steven (00:14):

Ben, I’m doing really good, although I’m just going to start out by correcting you because it’s not as always, you’re coming back from a little bit of a hiatus and I’m sure people are so excited to be hearing you again and not just me talking to myself. 

Ben (00:27):

I should say your humble host as sometimes. So we’re fresh off of our spring surge watch for that episode on the Retirement Starts Today Podcast. We talked about risk management. So what happens if we have to pay for the nursing home? What happens if we decide to sit in cash over the election? What happens if we’re on the wrong end of an IRS scam? So we talked about all that kind of stuff, so watch for that episode, but I’m super excited to be back here with you, Steven, to talk about taxes. So I had a two-part question that I wanted to run by you. First part was I had an interaction with a listener that they got ghosted by their accountant and they are now a couple of years behind on their taxes. Now I know that there has been withholding and it’s probably going to be fine, but the first part of my question was what do we do if we get in a situation where we haven’t filed our taxes for a couple of years?

(01:17):

And then as I was thinking about it, I thought there’s a second part of the question, and I have a lot of clients that are powers of attorney for their parents. So we’re talking about someone maybe in their eighties, and there are some instances where I think about during Covid, when we were getting stimulus payments, you had to have had file your taxes. So clients would say, well, my dad hasn’t filed his taxes in five years. He has only social security and a pension, so the standard deduction would cover it. Or his social security’s not taxable. So at what point do we not need to file taxes anymore? So two-part question, what happens if we haven’t filed in a few years? Are we immediately going to jail? And then the second half is at what point do we stop filing taxes?

Steven (01:54):

Yeah, those are great questions. I love the real-world applicability of that and we’ve come across a couple of situations recently helping clients as well. So this is a great topic, it always tells me if it comes up more than once, this is something we need to talk about. So let’s start with the, Hey, I haven’t filed taxes in a few years, which right out of the gate, I’m just going to say not ideal. We want to stay on top of our tax filings. It’s just a good thing to do. But let’s reassure everyone out of the gate that I have never personally met someone who has gone to jail for not filing their taxes. Sire, in the movies in Mafia land, there are certainly situations where avoiding taxes can land you in jail. I’m going to go ahead and bet that no one listening to our show is at risk of that, even if they’ve missed a few years of tax filings.

(02:37):

The potential downside, or one of the potential downsides is that the interest in penalties can start stacking up because there are penalties for not paying your taxes. There are penalties for not filing your taxes. Sometimes we can work on trying to get those waived depending on the situation as to why you weren’t filing your taxes. But I don’t want people walking away from this worried that they might go to jail or the thought that can come with that sometimes is maybe I’m better off not catching up those tax returns and just hoping nobody notices and just personally not a fan of that approach to life, especially with taxes, we don’t want to take the approach of let’s hope no one notices. That’s just not a winning mentality. So if you’re in the situation, if you have a family member in this situation where it’s, Hey, it’s been a couple of years, my accountant ghosted me, life got crazy.

(03:24):

I was working with one client who’s just traveling internationally for years and just really didn’t end up in a spot where they had all of their documents together. They had paper documents in three different locations. It’s okay, it’s time to get caught up. What do we do now? And this might sound overly simple, but what you do is you go back and file your taxes. You go back to the returns that were relevant for that year. So you’re pulling the IRS 1040 for that specific year, and you’re filing your tax return as if it had been on time. You’re going to go back and provide all of the original information. You’re going to submit it to the IRS. You’re most likely going to get a lovely little letter from the IRS that says, oh, by the way, we think you owe some additional penalties and interest, but we’re going to go back and get it cut up and get back to being in good standing with the IRS.

Ben (04:07):

So if it turns out that we do owe a bunch of money, what are our options? So we owe, let’s say $10,000. We owe $10,000. There’s going to be potentially taxes and interest as well. Do I have to cough up 10,000 right away or are there options for a payment plan or do I just have to stamp license plates in prison until I catch up on my 10,000 bucks?

Steven (04:28):

Yeah. Again, the great news here is all of the situations I’ve ever dealt with personally, probably everyone who’s listening to this, even if you were to come across a situation, we’re not worried about jail time. But it’s a great question, Ben, of, okay, what do I do if I do have fact taxes? And this is going to, we got to think about this in ranges. It’s all going to be situation-dependent and what you are able to handle from a cash flow perspective. Best case scenario is you pay the taxes and you move on. That’s going to stop the clock on any interest, on any penalties. It’s going to resolve the issue. You’re going to move forward, especially when we’re dealing with potential issues with the IRS, the more we can do to show that we’re acting in good faith and doing everything that we can, the better off we are.

(05:05):

So even if we can’t pay the full balance, I always recommend that we pay something so that we’re again demonstrating good faith to the IRS. If for whatever reason, we’re not able to pay the balance, so it’s a cashflow issue as far as access to cash liquidity or it’s, Hey, geez, this is a huge amount and this is 200, 300, $400,000 and what am I supposed to do sell my house? So we kind have different situations there. If it’s less than $50,000, we’re looking at how quickly can I do that on my own? That’s probably more of a liquidity issue as opposed to I’ve got to sell my house to cover it and under $50,000, their IRS doesn’t really have great programs for, how do we address this if it’s over $50,000, the IRS actually does have a program for potentially having essentially installment payments to make these have a formal payment plan over time.

(05:55):

The IRS does charge interest. At this point, it’s like eight or 9%, so it is not small dollars, so that’s not ever my first choice, but certainly something I’ve worked with clients on when we start dealing with very large amounts, especially if there’s large amounts of penalties and interest, this is where engaging with some kind of tax resolution specialist can be a really good idea. This is not something I do personally. I’ve worked with a couple of people who are really good at it, but we’ve got to be really careful about vetting who we work with because there are, unfortunately, it’s an area where there’s a lot of agencies out there who are very aggressive with how they approach this, and you just like any professional service, you want to be careful about looking at reviews and references, trying to find trusted people you can work with so that you’re not getting in with someone who’s going to promise you the world without being able to deliver on that. But when we get into very large dollar amounts that are due to the IRS, again, that’s going to be relative to your situation. That might be time to pause and say, Hey, do I find a tax resolution specialist?

Ben (06:54):

Would a CPA be a good place to start to potentially find a referral to a resource like that?

Steven (07:00):

Especially if you have a trust relationship with A CPA, I would definitely start there. For me, this is one of those areas that you want to have somebody who does this all the time. It’s the same way I feel about international taxes. It’s the same way I feel about certain business taxes. When people come to me with some of these things, it’s not that I’m unwilling to discuss it or that I think it’s some icky area that I shouldn’t touch. It’s just not what I do all day, every day. We get into tax resolution, we’re really getting into the weeds of how the IRS’s processes work and how some of their rules work, and we’ve got to make sure we’re threading that needle very carefully. And so you want someone on your team who does this all the time.

Ben (07:36):

That makes sense. Yeah. CPAs like CFPs can specialize in unique areas, and so if you owe the IRS a big piece of money, do you want to hire someone that’s done this one time or 1000 times? You definitely want the person who’s done this a thousand times. 

Steven (07:49):

Absolutely. Like I said, I think one of the most important things is my recommendation would be if you’ve gotten to the point where you say, Hey, wait, I’m out of date on my taxes. I need to get this cut up. That’s the first step is we’ve got to get the taxes filed. Because for the IRS, it’s two different things. If I have back taxes and if I’m out of compliance, I’m even filing my tax return because you’re stopping the clock on certain penalties just by filing the return, even if you don’t make the payments quite yet.

Ben (08:13):

Okay, so in this example, we’re thinking about paying in because that’s the scary thing. What about the reverse? What if I haven’t filed my taxes in five or six years and I’m pretty sure I’m owed to refund? Well, the IRS go back indefinitely to pay me a refund, or is there a certain amount of years they won’t, like a statute of limitations almost where they won’t go back more than three or four years to pay me my refund?

Steven (08:35):

Ben, this is a great conversation and I’m totally fine with everyone hearing my answer to this because I am pretty transparent about the fact that I haven’t committed all the answers to memory because I can confidently tell you there absolutely is a statute of limitations. We cannot go back indefinitely. The IRS has so many different statutes of limitations on when can we request a refund, when can we amend a return that I don’t have my cheat sheet right in front of me. Three years was the number that’s coming to mind for that. Three years is definitely the number for being able to amend returns. And so yes, it is not indefinite yet, another reason that we want to stay current on this stuff as often as we can.

Ben (09:10):

The second part of my question is sort of the other end of the spectrum in that if we are power of attorney for our parents and their income is low or they’re very elderly or both, at what point do we not need to worry about them filing taxes anymore? I’m assuming the year that they die, we want to file because there could be income with respect to the decedent, but at what income level or at what lack of complexity? The juice is not worth the squeeze for filing our parents or an elderly loved one’s tax returns. I think what brought this up was COVID stimulus payments, but I could be wrong about that.

Steven (09:40):

So let’s set aside COVID stimulus payments for just a second. We’ll come back to it because that’s kind of a unique situation. So in general, the IRS basically has “ad minimus” rule where they say, you are not required to file a tax return if you don’t meet certain criteria. And so if our income is below a certain threshold, and the easiest way to think of this is the standard deduction, which this is one of the few places where the IRS is applying logic that I agree with. The IRS is basically saying that if your income is less than the standard deduction, then the standard deduction would wipe out all of your income anyways. And what’s the point of filing a tax return? As we get to that point, or if we have, you mentioned clients with POA over elderly parents, if us ourselves or someone that we’re responsible for is getting to that point where our taxable income is getting smaller, then we want to start looking at, Hey, do we just make sure that no taxes are being withheld from any of these sources of income so we don’t have to file to request the refund, and then we can just stop filing a tax return because we’re below that threshold and we’re not required to anymore.

(10:39):

And so it gets a little bit more nuanced if one of our sources of income is social security, because not all of social security is taxable, but in general, if our income is less than the standard deduction, hey, we’re in the clear, we’re not required to file a tax return.

Ben (10:54):

Interesting. Now that I’m thinking about it, I became a financial advisor the day before the financial crisis started. I think I became a financial advisor and just ruined it for everyone. Of course. Yeah. I think what it was was I think we received stimulus payments around, was it after 9/11 maybe, or was it during the financial crisis? I can’t remember. There were others before COVID. There were other stimulus payments. 

Steven (11:16):

No, you’re absolutely right. Because my wife and I got ’em right after we got married in 2007. It was Bush some kind of tax thing. I don’t remember what it was called, but yes, you’re absolutely right. Geez. Compared to Covid, they were tiny, right? I remember being like a few hundred bucks and I had just gotten married. It blew my mind. We had this free money. Now I’ve paid so much in taxes that I kind of regret that they ever sent that money to me. But that’s a whole different conversation.

Ben (11:37):

You thought maybe you invited George and Laura to your wedding and that was a wedding gift. Maybe.

Steven (11:41):

That would’ve been nice, Ben. There can be these situations, and this is why we want to pay attention or have a financial advisor, a CPA in our life that’s paying attention for us, that we might go years without filing a tax return and then something might change, whether that’s stimulus money. There’s a change in the rules, and I’m dealing with this with a client right now where for years their income was low enough that they weren’t required to file a tax return and then a new source of income kicked on. And so now it’s suddenly, oh wait, we’re back over that threshold. So this isn’t a one-and-done determination. It’s not just because we turn 75 and our income’s low enough that we don’t have to file, that we never have to file again. We still have to be thinking about this each year.

Ben (12:20):

Now, would that be some kind of an audit red flag to not file for a few years and then all of a sudden start filing again? Is that something we need to be worried about?

Steven (12:27):

IRS plays it pretty close to the chest on what actually is an audit red flag. But from my understanding and my experience with clients, especially as we work with people who are preparing into through retirement, that age factor definitely comes into consideration. And so I have not had a client who stopped filing their taxes with their income was too low and then started again and then suddenly got audited. We’ve got to remember that even if you’re not filing a tax return, the IRS is still getting your tax documents. They’re still getting the 1099 from Social Security. They’re getting the 1099 from your brokerage account. So they’ve still gotten their system. They’re not just wondering, Hey, what happened to Ben? Why isn’t he filing taxes? In their system, they can see, looks like Ben retired and now he’s only making 20 grand a year, which obviously won’t be the case for Benjamin Brandt, but there’s a Ben out there who’s in that situation. So they can see that. And so then if several years later we start filing again because this new source of income kicked on, we inherited a bunch of money and now we’ve got investment returns that were larger than they were before. There’s different ways this would come up that’s not going to suddenly subject you to an audit.

Ben (13:30):

That’s good news. That’s good to hear.

Steven (13:31):

Now, in contrast, originally we were talking about, Hey, what if I just didn’t file the last few years of returns? Again, I don’t know the magic formula for the IRS, but absolutely if we’re in the middle of our earning years and the IRS is getting W2s from us each year that say, Hey, I’m making 200 grand and I’m not filing a tax return, it’s not so much the fact that we didn’t file, then we started filing again, it’s that they’re getting income reports from us and clearly aren’t getting a return along the way.

Ben (13:57):

Right? So when we file our return, that’s sort of the second half of the information that the IRS is looking for. We work for whatever company we work for, the W2 goes to the IRS and there’s no return from us to rectify it. So at some point, if they’re getting a year or two or three or four or five years of W2s or 1090 nines and nothing from us, I assume at some point they’re going to send us a letter or something, right?

Steven (14:18):

Absolutely. The IRS gets really backlogged on this stuff. And so we also can’t just assume that because we haven’t heard from the IRS yet that it means we’re in the clear. Because the other thing about not filing tax returns is before we were talking about statutes of limitations and the IRS has statutes of limitations on how many years they can go back and look at our tax returns. With a couple of exceptions, if we aren’t filing a tax return, the statute of limitations has never started. Or if we’re committing crimes or fraud, which just across the board would not recommend.

Ben (14:46):

Okay, so if I’ve missed my taxes one year, don’t hear from the IRS. It’s not like I have to make it seven years or something like that and then I’m free. They could go back indefinitely if I’m not filing and closing my eyes and hoping for the best does not keep saving me. 

Steven (15:00):

There’s great point to specifically call out. This isn’t just a waiting game of let’s hope we can run out the clock before they notice.

Ben (15:05):

Okay, that’s, I’m going to write that down. That’s good tip. Hot tip of the day. You can’t put your head into the sand and hope the IRS will forget about you.

Steven (15:12):

Well, Ben, I happen to have firsthand knowledge that you are in fact up to date on your tax filing. So I don’t think this really is, hopefully this never becomes applicable to you personally. 

Ben (15:21):

That’s true. By the time this airs, Steven will have completed my taxes. That’s exciting. Speaking of late filing or not filing, I did have a couple people reach out and ask about extensions. There is a rumor online that if I file an extension that’s a guarantee for an audit or an increased risk of audit, can you help stoke those fears or maybe put them to bed?

Steven (15:39):

Yeah, so Ben, I file an extension for myself every single year. I wait on a K1. That doesn’t come till later in the year and I have not yet been audited, but who knows, maybe someday it will be, but no extensions are a normal part of the IRS’s process. This is just a proactive step that’s allowed under the rules. Just like doing a Roth conversion is a choice we can make that’s allowed under the rules. Extensions are not any kind of immediate red flag and for people who’ve never filed an extension before, I totally get where this comes from. It feels like we’re suddenly late on our homework that we can’t possibly be in good standing anymore. And an interesting clarification though that has come up a couple of times recently is that you can only file an extension through the original filing deadline. So if you don’t file an extension by April 15th, we’re recording this at the beginning of May. You can’t now file an extension at the beginning of May and then wait until October to file your return. You are out of compliance if you didn’t get that extension filed on time. And so the best course of action at that point is to just do what you need to do to get your actual return filed.

Ben (16:40):

So what would be the difference if we have a mutual client and for some reason we don’t get that extension filed by April 15th, but then still get their taxes done by May 1st? Is there a big difference between those two situations? One, we got an extension file just hypothetically speaking, one, we got an extension filed and then got their taxes done April or May 1st one, we didn’t get an extension file, but still got them May 1st. Is there a big difference between those two situations? Just out of my own curiosity? There

Steven (17:05):

Certainly can be. It’s going to come down to how much taxes were due with the return. There’s interest on waiting to make the payment whether we have an extension or not, because we’ve talked about that before on the podcast, that even if you file an extension, if you have taxes due, they’re due by April 15th. So whether we have an extension or not interest is going to start accruing. The biggest difference is going to be that there are non-filing penalties that are in part tied to the amount of taxes outstanding. And so especially if we have a large tax bill, there can be a big difference in the final outcome on whether or not we got that extension filed.

Ben (17:37):

Interesting. Excellent. Well, this has been eye-opening for me, Steven. I’m definitely going to file my taxes this year with your help, so I appreciate that. But it’s also great to think about all of our parents who are getting older, and at some point if their income doesn’t beat the standard deduction, we just modify all of their income so there’s no withholding and we can probably save ourselves that trip to the senior center to help them file their taxes. But appreciate your input today, Steven, as always. 

Steven (18:00):

It’s great to have you back on the show. I really enjoyed doing it.

Ben (18:02):

Happy to be back. Happy to be back. So until next time, don’t let the tax man hit you where the good Lord split you.

Steven (Disclaimer) (18:07):

Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.