Q. I know I can’t blame my mother’s illness and subsequent death in early 2012, and it’s probably not accepted by the IRS as an excuse for not filing my income taxes, but I’ve just discovered that I didn’t file my taxes for 2011. I always do my own taxes with tax software, and I guess I just forgot. The IRS has not contacted me, and I didn’t make a whole lot of money that year but enough that I was required to file. I also don’t have a pile of money lying around to pay what I’ve estimated I owed for that year. Shall I just lie low and wait until they contact me in the hopes they never do, or should I initiate contact with the IRS on this matter?
A. I’m sorry to hear of the loss of your mother. You are correct that a death in the family is not an acceptable reason for not filing your taxes. I’m not a tax professional, and I suggest you hire one for this “matter.” A tax professional can make sure you file your back taxes correctly and help you determine the best plan to lower fees and penalties. In general, when you have a crisis in your life, it may be a good time to spend some money and hire professionals to take over some of the tasks you normally do yourself.
It’s very doubtful the IRS is going to overlook the fact that you didn’t file your taxes for 2011. Failing to file taxes is a federal offense, punishable by fees and possibly a prison sentence. Not filing and not paying what is owed are two different acts, and there are IRS penalty fees for both. Fines and penalties increase the longer you wait to file. A tax professional will know this, but you will need to use the correct form when you file, so you’ll need to get the IRS form for tax year 2011. Your preparer will have this or can get it for you. If you chose not to use a tax preparer, you can get the proper form from the IRS website or an IRS office.
Don’t put off filing just because you don’t have the money to pay taxes owed. The IRS has programs in place to help taxpayers unable to pay their back taxes in a lump sum. These plans can be used when you are unable to pay current taxes as well. Most taxpayers owing up to $10,000 will have an application for an installment payment plan automatically approved by the IRS. The typical way to request an installment agreement is to file IRS Form 9465. You can attach this to the front of the tax return when you file or submit it separately. If you owe less than $25,000 in taxes, penalties and interest, you can complete an online payment agreement. If you owe more, you must submit a Form 433-F (Collection Information Statement) along with Form 9465.
There is a cost for not making your payment in a lump sum. There is a set-up fee which is reduced if you agree to have your payments debited directly from your bank account or if your income is below a certain amount. You are also charged a daily compounding interest rate equal to the short-term federal funds rate plus 3 percent, calculated on a quarterly basis. In addition to the interest charged, you will also be assessed a failure to pay penalty ranging from 0.05 to 1 percent on the unpaid balance each month. Total penalties and interest can add up quickly. Here is an example using the current short-term federal funds rate of 3 percent and the lowest failure to file penalty of 0.05 percent: The IRS will charge a 6 percent interest rate on the outstanding balance and another 6 percent annually in penalties until the balance is completely paid.
If you forgot to file your federal tax return, it’s likely you owe the state a return as well. Don’t neglect the state when you correct your omission for 2011.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624