The most common reason that people fail to file a tax return is that they know they will owe taxes but they cannot afford to pay them at that time. You should try to file all of your tax returns when they are due, regardless of whether you can pay the tax due at that time. Doing this will cut down on the penalties you must pay for failing to file a return.
The process to file a prior year tax return is very similar to filing a current year tax return. Most software programs will allow you to pick the year for the taxes you are filing. If you are filing a paper return, you should send it to the same location as you would send your on-time tax return.
You will need prior year tax information to file your return, and this information may be difficult to acquire in some situations. The IRS offers a helpful transcript service that could be beneficial if you are filing a prior year return.
Importance of Filing Prior Year Tax Returns
The biggest reason to file a prior year tax return is to avoid any penalties that are associated with not filing a return. Paying on time also helps you avoid further penalties and interest charges.
If you are owed a refund, you should also file a return to get that refund. If you wait too long, you may waive your right to your refund. You must file within three years of the due date to obtain your tax refund. The IRS will also hold refunds if it discovers that you have not filed a prior year tax return. They hold the refund until the past-due return is filed or they are provided with an acceptable reason that you did not file a return.
It is especially important that you file your return if you are self-employed. Failure to report self-employment income will mean that your income is not counted for Social Security purposes. That could affect your ability to receive Social Security benefits in the future.
Another potentially unforeseen consequence is that failing to file your taxes could affect your ability to get a loan. Most financial institutions require that you submit a copy of your prior year tax return to get a home or business loan or receive aid to pay for college. Failing to file your returns has an effect on these types of transactions.
If you do not file your tax return, the IRS may file a “substitute” return for you. Essentially, the IRS guesses regarding the amount of tax that you likely owe based on your prior year returns or based on the information that your employer submitted to them.
Substitute returns often do not take full advantage of the credits and deductions that may be available to you. For this reason, even if the IRS files a substitute return for you, you should still file a return to potentially reduce your tax obligations.