I have not filed an income tax return for the past five years. My brother-in-law told me that the IRS has a statute of limitations of three years. Does that mean I am home free on my two oldest returns?
Many taxpayers are familiar with the fact that the IRS has a three year window in which to assess additional taxes, but the point most miss is that the three year period does not start until the return is filed. My advice is always to complete all unfiled returns and to mail them as soon as possible. It should be pointed out that the IRS currently has ten years, from the date of assessment, in which to make collection on personal income taxes.
I just know that I am going to have a large balance due on my tax return, so I’m not even going to prepare it until I have the money to pay my taxes in full.
This is probably one of the most common mistakes taxpayers make, and it’s usually unnecessarily costly as well. In my experience approximately 30% of all returns filed late are due a refund rather than having a balance due. And if a balance is due that the taxpayer can’t pay in full, the IRS usually will allow the taxpayer to pay off the balance over a period of time. Also, keep in mind that the IRS will deny any claim for a refund on a late-filed return unless the return is filed within two years of the time the tax was paid. I have seen thousands of dollars lost due to this portion of the tax code. Not only that, but even if you have a large balance due, you will save money by filing your return on time. A late filed return is subject to a failure to file penalty of 5% per month (for the first five months) and a failure to pay penalty of 1/2% per month. If you file but do not pay your balance, you will save 5% per month (for five months). Keep in mind that both of the above penalties plus the balance due are subject to interest. A smart tax move.
As you can readily see, the tax code leaves some room to utilize the statute of limitations to your advantage but, without a comprehensive understanding of the tax code, a little bit of knowledge can prove very costly.
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