When it comes to getting up to date on your taxes, is it advisable to file back taxes? It is possible that it is still within your reach to file a tax return for a previous year in order to settle your outstanding balance or retrieve any refunds owed to you. Discover more about why one might consider filing back taxes and the steps involved in initiating this procedure.
Should you File Past Taxes or File Back Taxes?
By submitting past-due tax returns, you have the potential to achieve various benefits. These advantages include the ability to request a refund, avoid penalties and interest associated with late filing and payment, obtain tax return documentation for loan applications, and fulfill the necessary requirements to pay Social Security taxes and qualify for benefits.
Get in touch with a free Dedicated Tax Professional to walk you through filing back taxes from start to finish to avoid any additional penalties.
1. Claim a Refund
Filing a previous tax return can serve the practical purpose of uncovering potential tax refunds owed by the IRS. People often have their federal income taxes deducted from their paychecks, but an excessive amount is withheld occasionally. By submitting a tax return, you may be eligible for a refund that boosts your bank balance.
2. Stop Payment Penalties and Interest from Past Tax Filing
To prevent or reduce penalties, submitting your tax return before the deadline is crucial, regardless of your ability to pay the amount owed. Please file to avoid an additional 5% charge for each month your return is overdue for up to a maximum of five months. Please note that there may be minimum penalty thresholds in place.
In the unfortunate event that you cannot pay your taxes owed on time, the IRS imposes an additional penalty. Should you dutifully file your taxes by the deadline yet find yourself unable to pay the total amount owed, a charge of 0.5% will be applied to the unpaid tax for each month (or part thereof)
Until your outstanding balance is completely settled or the penalty reaches a maximum of 25% of your taxes, the accumulation of these fees will persist. Additionally, the IRS imposes interest on unpaid taxes. Unlike penalties, interest continues to accrue even when the failure to tax file and failure to pay penalties from it.
3. Prepare Tax Returns When Applynig for a Loan
When seeking certain types of loans, like mortgages or business loans, it is essential to provide documentation of your income during the approval process. To streamline the process, ensure your tax returns are filed before making a loan application.
4. Pay Social Security Taxes for Tax Benefit Qualification
Entrepreneurs who work for themselves are required to fulfill their Social Security and Medicare obligations by submitting their individual tax returns. Through this process, you not only declare your earnings but also become eligible for future Social Security retirement, disability benefits, and Medicare assistance.
How Late Is Too Late?
The IRS highly recommends that individuals file any past-due tax returns for any years that still need to be filed. Generally, the IRS expects taxpayers to file their last six years of tax returns in order to maintain a good standing.
Regrettably, there exists a restriction on the length of time in which one can file a tax return to seek tax refunds and credits. The Internal Revenue Service (IRS) enforces a policy that solely permits the claiming of refunds and credits within a three-year timeframe, counting from the initial due date of the tax return.
You must submit your tax return within three years of the deadline to avoid forfeiting a potential tax refund. This means you will no longer be eligible to claim advantageous tax credits or any extra funds withheld from your salary.
Filing back taxes for previous years is a possibility that should not be overlooked. However, it is important to note that the IRS typically deems individuals compliant if they have filed their tax returns for the last six years.
In accordance with the stipulations set forth by the IRS, individuals are permitted to claim refunds and tax credits solely within a three-year timeframe from the original due date of their tax return.