Who needs to file a return and what happens when you don’t?

## Who needs to file a return and what happens when you don’t? Everyone files a tax return every year, right? Well, not always. If you do not make any money, or little money, you may think you do not need to file a return. This article will help you understand why filing a return may be more important than you think. #### *Why you may want to file a return even when you don't have to file* Virtually everyone has a tax account with the IRS whether he or she realizes it or not. U.S. citizens and resident aliens have a Social Security Number (SSN). Nonresident aliens are assigned Individual Taxpayer Identification Numbers (ITIN). The IRS sets up a tax account by SSN or ITIN for all individuals that owe tax, owe a penalty, have withholding, make estimated payments, or are due refundable credits. The sum of each year’s tax account either nets to **tax due** to the government or a **refund due** to a taxpayer, but rarely ends up net zero. If you have more in tax due than tax paid in either from withholding, estimated tax payment or credits, **you owe taxes**. On the other hand, if you have more paid in withholding, estimated tax payments, or credits than tax due, **you are due a refund**. Therefore, even if you owe no tax and do not have enough income to meet a threshold to be required to file a return, your tax account may have some money in it that is just sitting there. However, you need to file a return to get it even if you are not technically required to file. Trust me. I worked over 30 years for the IRS. If you do not claim a refund due you, the Service will let the money sit there in your tax account until the statute runs and it is too late to claim the refund. That is why it is important to consider whether you should file a return even when by law you might not really need to. #### Examples 1. Perhaps you are receiving Social Security and have chosen to have the Social Security Administration withhold income tax from your Social Security payments. If what you are receiving in Social Security is too small to require a return, but income tax has been withheld, you need to file a return to get it back from the IRS.

2. Perhaps you worked part-time or maybe part of a year and did not earn enough money to file but have had money withheld for income tax. Again, you need to file a return to get back the money you paid into your tax account.

3. Perhaps you had a job that did not pay enough to require your filing a tax return. However, if you have a child or other dependent, you might want to file a return to receive Earned Income Tax Credit, Additional Child Tax Credit, or other refundable credit.

4. Perhaps you are a college student with a small part time job. If you are in your first four years of college and do not owe “kiddie tax” (investment income that exceeds a threshold amount which is projected to be $2,200 in 2021), you could qualify for the American Opportunity Credit. This credit is partially refundable. Therefore, if you qualify and do not file, you are leaving money in your tax account that you are due. Remember, even when you do not need to file, you may still need to file to claim any amount in your tax account due you each year. #### *What if I do not file and owe no tax?* Do not leave money on the table if you have not filed and are due a refund. What happens if you do not file depends on your tax account. As pointed out above, each year the IRS sets up a tax account for each taxpayer. Simply put, each year the IRS totals up the credits and debits in each tax account. After netting the total debit and credits, each taxpayer either owes tax to the government or the government owes money to the taxpayer. In rare instances, amounts owed equal amounts due and it cancels out. Therefore, if at the end of a tax year you have more paid in than tax due, you have a potential refund sitting in your tax account. If you are required to file and do not file, the IRS will not really do very much. Delinquency penalties such as failure to file and failure to pay are based on amounts due. Consequently, if there is no amount due (a refund situation) there is no penalty. The IRS cannot make you file if you do not owe tax and will rarely chase you down to file a claim or return for a refund. As a Revenue Agent, I only chased down one person in 35 years to have that person file a return to get a refund. Do not leave money on the table if you have not filed but are due a refund. If you are due a refund and have not filed, you need to file a return within two years from a return’s due date to receive the refund, not the usual three years. The IRS will even pay interest on the refund, and there is no penalty if there is no tax due. If you have not filed and are due a refund, I can help. Contact me before it is too late. #### *What if I do not file and do owe tax?* If your tax account shows you owe tax in a tax year, the situation is different. Penalties such as failure to file and failure to pay are asserted on tax amounts due. The failure to file penalty is 5% a month, or part of a month, up to a maximum of 25%. The failure to pay penalty is .5% a month, or part of a month, up to 25%. The two penalties run concurrently and when they do, the failure to file penalty is reduced to 4.5% a month for the months the failure to pay penalty is also asserted. Therefore, the total potential penalty would be 48.5% if a return is delinquent long enough. The IRS will also compute interest compounded daily on any tax due and not paid. Normally, a person files a return, and the statute of limitations runs three years after the later of either the due date or the date a return is filed. If no return is filed, then the statute of limitations does not start running and stays open for as long as the return is not filed. If you do not file, the penalties will accrue up to the maximum and interest will continue to compound and accrue daily. As a Revenue Agent, I saw instances where a taxpayer was so delinquent that the penalties and interest were greater than the original tax due. Do not let this happen to you if you owe tax and have not filed. Life happens. Sometimes you get sick, go through a divorce, have a financial setback, or some other adverse life situation, and filing a return is at the absolute bottom of your list of priorities. Hopefully things change, life gets better, and in the back of your mind you know you need to file a delinquent return but are not sure what do. I can help you. If you do have a tax return that is delinquent, the sooner you address the problem the smaller the problem will be. The sooner you file a delinquent return, the sooner you can stop penalties and interest from accruing and stop the problem from getting bigger. If you need to file a delinquent return, contact me, and I can help you file the delinquent return and plan how to deal with the tax, penalties, and interest due. If the IRS is already breathing down your neck about filing a return and is trying to collect, I can help with that, too. #### *Filing Thresholds: Who the government says needs to file a tax return* Generally, a federal income tax return must be filed each tax year by a U.S. citizen or resident alien when gross income equals or exceeds a threshold amount, based on filing status. For married individuals filing jointly, the filing threshold applies to the couple’s combined gross income. However, a married couple can only file a joint return if the couple shares the same household at the end of the tax year, neither spouse files a separate return, and neither spouse is a dependent of another taxpayer. For example, if one spouse or both spouses of a married couple are supported by a parent and could be claimed as a dependent by that parent, then the couple cannot file a joint return. The couple would have to file separately and then the filing threshold for married filing separately would apply instead of the threshold for married filing jointly. Due to the Tax Cuts and Jobs Act of 2017, for tax years 2018 through 2025, the filing threshold of an individual generally is the standard deduction amount for the tax year. A filing threshold also includes the additional standard deduction for a person over age 65, but not the additional standard deduction for a person who is blind. Note that the IRS requires married individuals filing separately to file a return if their gross income is at least $5.00, regardless of age. The filing threshold for tax years beginning in 2020 is: |Single | $12,400 | |Single, 65 or older |$14,050 | |Married filing separately | $5 | |Married filing jointly | $24,800 | |Married filing jointly, one spouse 65 or older | $26,100 | |Married filing jointly, both spouses 65 or older | $27,400 | |Head of household | $18,650 | |Head of household | $20,300 | |Qualifying widow(er) (surviving spouse) | $24,800 | |Qualifying widow(er) (surviving spouse), 65 or older | $26,100 | Dependents – A child or other individual that can be claimed as a dependent is subject to different filing thresholds based on earned or unearned income for the tax year. A dependent who is neither 65 or older, not blind, must file a tax return for the 2020 tax year if he or she has: - Unearned income over $1,100 for 2020 (projected to be $1,100 for 2021) - Earned income over $12,400 for 2020 (projected to be $12,500 for 2021) or - Gross income more than the larger of $1,200 or earned income up to $12,050, plus $350 for 2020 (projected to be $1,100, $12,200, and $350, respectively for 2021) - If the dependent is age 65 or older, or is blind, the filing threshold includes the additional standard deduction amounts #### *Additional requirements* If the filing threshold is met and no income tax is due but other taxes are due, then a return must be filed. A return must be filed if a taxpayer is liable for: - Alternative minimum tax calculated on Form 6251 - Social Security and Medicare (FICA) taxes on tip income not reported to an employer, as calculated on Form 4137, or on wages received from an employer who did not withhold the taxes, as calculated on Form 8919 - Uncollected Social Security Taxes, Medicare, or Railroad Retirement Tax Act (RRTA) taxes on tips reported to an employer or on group-term life insurance - Additional taxes on a health savings account (HSA) or an Archer medical savings account (MSA) calculated on Form 5329 - The net investment income tax (NIIT) calculated on Form 8960 or the Additional Medicare Tax calculated on Form 8959 - The recapture of the following: first-time homebuyer credit, investment credit, low-income housing credit, new markets credit, employer-provided child care credit, alternative motor vehicle credit, alternative fuel vehicle refueling property credit, qualified plug-in electric drive motor vehicle credit, or on the disposition of a home purchased with a federally subsidized mortgage - Net earnings from self-employment for the year are at least $400 - Wages of $108.28 or more earned from a church or qualified church-controlled organization that is exempt from employer FICA taxes - Advance payments of the premium assistance tax credit or health care coverage tax credit received - The taxpayer is a U.S. shareholder that is required to include his or her pro rata share of income of a deferred foreign income corporation and has elected to pay the net liability in installments - If a taxpayer has not met the filing threshold and owes no tax, a taxpayer can separately file the appropriate form and no return for the following items: additional taxes on a qualified retirement plan or individual retirement plan (IRA) and household employment taxes. #### *Which group are you?* Some people are required to file a return, and some are not. Make sure you know which group you are really in. Some people believe they do not make enough money to file a return, but do not realize they owe another tax other than income tax or have recapture of a tax credit. The other tax makes filing a return required. If your situation is that you have not filed a return for a year, or a period of years, but you were required to file, then you should file as soon as possible. Filing a delinquent return will stop the failure to file penalty if done in time. Paying the tax or working out a payment plan with the government will reduce interest on the remaining mount tax due. Addressing a delinquency sooner rather than later will minimize the amount due to the government. Do not be afraid to file a delinquent return or work out an installment plan if necessary. Let me help. The sooner you take care of your business, the less you will end up paying. Not everyone is required to file a tax return; however, sometimes it makes sense to file a tax return anyway. If you are due a refund because you paid more in than you owe, or because you owe no tax, you should file a return. If you owe no tax and are due a refundable credit, you should file for a refund. Failing to file a return when you have an amount available for a refund is just giving money away. Do not give your money to the government.