Here’s the first installment of the Back to the Basics series that I introduced last Tuesday. The question of the week is why should I file my tax returns. Well, the simple answer is that it is against the law not to file your tax returns. Usually preventing someone like the IRS from seeking criminal penalties against you is enough, but there are some reasons related to negotiating with the IRS to file your tax returns.
The IRS cannot collect taxes from you without assessing taxes against you. Therefore, Congress has passed a law that allows the IRS to use the financial information they have on file for you and create a substitute return so they may assess the tax against you and begin collecting. When the IRS creates the substitute for return, they do not add in all of the deductions and exemptions you are entitled to and you almost always owe much more money than had you filed your own return. So if you have not filed your tax returns, and the IRS is claiming that you owe tons of money, often filing your own tax returns will fix most of the problems.
When you want to file an offer in compromise you are required to have the last six years of returns filed (so they can negotiate the tax assessed against you). If there are no substitute for returns on file, you will not be able to file an offer in compromise to attempt to settle your outstanding debt.