Many of us enjoy tax time because it means a big tax refund. It's a nice opportunity to pay off some debt, make a down payment on a car, or just save for a family expenditure.
However, you might be surprised to hear that billions of dollars in refunds go unclaimed every year. It's not because of missed tax credits or deductions. It's simply the result of willful non-filing of tax returns. It sounds a little strange, but it is the truth. Here's how it works.
The IRS has a three-year statute of limitations on any refunds. What this means is that you have three years to claim a refund for an unfiled tax return. But what if you have unfiled tax returns and owe the IRS? You will owe the money, plus interest and penalties. Not real fair right? But that's the law.
It's really easy to collect your refund -- you just have to file. With the three-year statute, taxpayers have until the deadline of April 17, 2018 (a little-known holiday on the 16th gives you extra time) to claim a refund for 2014. If you miss this deadline, your refund will be forfeited and become the property of the U.S. Treasury.
This can cost you hundreds of thousands of dollars.
It happens quite often. Someone comes into my office who hasn't filed a tax return in many years. After contacting the IRS, doing a little research, and preparing the returns, I come back with both good and bad news.
The good news is that they don't owe the IRS anything and are getting refunds. The bad news is that they won't receive those refunds. The filings were just too late.
I once had a client who failed to file tax returns for over 10 years. The fact that he failed to file for 10 years isn't really the surprising part. I've seen clients fail to file for decades.
The surprising part was that he had refunds due in many of those years. As a result, he had to forgo over $100,000 in refunds. Not very smart, and he would agree with me: He's still a client today, but his taxes are now filed on time.
It's why filing your taxes on time is actually important.
Most business owners don't care too much for tax season. That's because they owe and don't like parting with their money.
But business owners can find themselves getting refunds. In many cases, they may have made estimated tax payments during the year and failed to file the return. Their business income may have been less than expected, which resulted in a refund.
Many taxpayers get credits such as educational credits, earned income credits and child tax credits that can magnify refunds. They may also have business losses that can be carried forward to future years.
In fact, the IRS does not even require a tax return for taxpayers that make below a certain amount, depending on filing status and the type of income received. But many taxpayers will still benefit from filing a return in order to get back any federal tax withholding or refundable tax credits.
Let me be clear: Filing a tax return late is the last thing you want to do. The penalties are just too large, and un-filed tax returns can lead to a lot of stress. Get your returns filed and let the cards fall where they may. Hopefully, you'll get a refund -- and learn a valuable lesson in the process.