Getting to zero: Why you may want to file a return even when you don’t have to

It’s tax season, and you made a little money, but not enough money to be required to file a return. Therefore, you can sit back and relax while everyone else works furiously to file a tax return. Well, not so fast. You might want to take a second look at your situation and see if you ought to file a return even if you do not have to, and here is why.

Almost everyone has a tax account. A tax account is a record the IRS keeps for each taxpayer to track how much a person might owe in taxes or penalties for a given year and to track how much credit a taxpayer might have on hand each year in payments such as estimated tax payments, withholding, or credits. Therefore, having a balance of zero in your tax account means you have paid any taxes or penalties due, or you have received any refund due. Consequently, you want your tax account to be zero, especially if you have more paid in than due. Getting your tax account to zero means you received any refund due to you from the IRS.

How does a person get a tax account? The IRS looks at people by taxpayer identification number and sets up a tax account for anyone that has any economic activity on record. If you are a U.S. citizen or green card holder, you will have a Social Security Number (SSN) as a taxpayer identification number. If you are a nonresident alien, you are assigned an Individual Taxpayer Identification Number (ITIN) as a taxpayer identification number. Therefore, if you have a tax identification number, the IRS will generally set you up with a tax account on its Individual Master File data system. Consequently, everyone who has economic activity each year has a tax account with the IRS. Economic activity means income or expense, from the IRS’ perspective, has been associated with your SSN or ITIN. Examples of income from the IRS’ perspective would include taxes and penalties because such amounts would be potential income to the government. Examples of expenses from the IRS’ perspective would include estimated tax payments, withholding, and credits because any excess over amounts due would be payable to a taxpayer.

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 waiting for you to claim it. 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 and you owe no tax, 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, did not earn enough money to be required to file, and again owe no tax, 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. 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 and you are not required to file a return. 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.

  5. Perhaps you had a distribution from an Individual Retirement Account (IRA) or pension, the fiduciary withheld tax on the distribution, but the amount distributed from the IRA was too small to require a return to be filed. A return needs to be filed to claim the amount withheld on the IRA as a refund.

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. Filing a tax return to claim a refund due gets your tax account to zero and gets you your money.