You should always file a tax return, even if no tax is due. There are several reasons why this is the case. First, the IRS has 3 years from the filing due date to assess a tax, but if no return is filed, there is no statute of limitations on assessment. If you don’t file a return, the IRS can decide to assess a tax deficiency against you at any time in the future.
When the Internal Revenue Service prepares a return for you, their position is usually the worst possible outcome – they do so in a way that maximizes the tax due; for example, they only allow one personal exemption, they only allow the standard deduction, and if you had any capital gains, like stock sales, they treat all of the proceeds as income. They also use other assumptions to determine what they think your income was, and those assumptions are always in their favor.
An IRS-prepared return (called a Substitute for Return or “SFR”) will often result in a tax bill that is inflated by thousands of dollars. The way to deal with that is to prepare a return and then file it. That generally reduces the amount of tax due that the IRS came up with using their SFR.
Business Tax Laws Vary by State
Many states (such as California) are notorious for preparing returns based on very tenuous evidence. For example, California’s Franchise Tax Board will assess a tax if you didn’t file a return but do hold a license, based on the average income of others with the same license. The Employment Development Department will assume your tax liability is the same as previous quarters, even if your business has ceased operation and is no longer hiring employees. The only way to prevent these outcomes is to file every return, every year.
If you have unfiled returns, we can help. First we can access IRS and state records to review any income or other transactions reported to the IRS, then work with you to determine your proper withholdings, exemptions, deductions, business expenses, and capital gains. Give us a call to get your unfiled returns behind you.