A big part of my tax practice is tax debt resolution. I help people resolve their tax debt by reducing their liability and sometimes eliminating their obligation to pay. Over half of my debt resolution clients don’t file tax returns for multiple years for fear they would owe the IRS. Let me say it loud for those in the back. Not filing your taxes is not going to keep you from owing the IRS. It will only leave you in the dark as to how much debt you are really in. 

If you know you will owe the IRS filing your taxes on time will help you avoid some penalties. You won’t get out of paying failure-to-pay penalties or interest that will accrue on the balance due, but you will get out of the failure-to-file penalty. If you need more time to gather your documents you should file an extension. The extension will grant you six additional months to file your return without a failure-to-file penalty. Just know it’s only an extension to file, not to pay. Your tax is still due April 15th. Your return is due October 15th. 

Filing even when you owe has its benefits. We all want to be aware of where we stand financially. You may think you owe more or less than you actually do. If you don’t owe a substantial amount at the end of the year the solution could be as simple as going to your human resources department and adjusting your W-4. If you owe more than you are comfortable paying at once, you not only need to change your W-4 but you also need to sit down and take a good look at your budget and personal finances. If you owe a good bit, changing your W-4 to have proper withholding will likely have a noticeable impact on your paycheck. The IRS has a withholding calculator that will help you determine the correct withholding for your household. If you owe the IRS for other reasons such as unearned income like interest & dividends, you may want to look at restructuring your investments. Either way, you need to be aware of WHY you owe the IRS so that you can change the situation going forward. 

Filing your taxes is one of the easiest ways to set up a payment plan. Just include form 9465 with your tax return to let the IRS know when and what you can pay each month. By setting up a payment plan you have a good chance of staying out of collections. Collections is the department that issues liens, levies and wage garnishments. Trust me, you don’t want to hang out in the collections department if at all possible.

Remember, the same W-2 your employer sent you is the same W-2 your employer sent to the IRS. That goes for any income document you received. So if you think the IRS just won’t know you owe if you don’t file, think again. They know. But by the time the system flags you as not filing you will be up to your eyeballs in interest and penalties.

What about if you are self-employed and don’t have any income that is reported to the IRS on your behalf? You will need an income document to borrow money, buy a car, house or have any type of credit extended to you. One of the first things lenders request are your tax returns. Also, self-employment tax consists of two things: Social Security tax and Medicare tax. If there is a such thing by the time you need to worry about it, you will want to have paid into both.

Long story short, file your taxes. Yes, even if you owe.