Did you miss the IRS tax filing deadline? You're not alone. Tax experts estimate between 8–12 million taxpayers who are required to file an IRS return do not file on time. Additionally, as many as 14 million taxpayers in the U.S. owe back taxes, interest, and penalties. Self-employed taxpayers in particular are less likely to file because they have to pay their own estimated tax and there may not be anyone filing a W2 or 1099 form on their behalf to alert the IRS that tax may be due.
Better Late Than Never
The IRS has only 10 years to collect the tax in most cases. Filing your return starts the statute of limitations. That 10-year clock begins when you file. On top of the tax owed, the IRS will assess a number of penalties and interest for late filers, including:
- Failure to file a return
- Failure to pay estimated tax
- Failure to pay tax due
- Filing an inaccurate return
The failure-to-file penalty accrues at 5% of the tax due per month for 5 months after the tax deadline. Filing soon after the deadline can stop that penalty from increasing to the maximum.
If you receive a W2 in addition to your private practice income, or if insurance companies or a group practice files a 1099 form for you, the IRS has that on record. If you do not file a return, the IRS may use the forms to create a “substitute for return” which generates a tax liability. They often omit deductions and credits which would reduce your tax. You will then need to quickly file a return, appeal, or pay their estimate of tax owed.
To avoid that, here are steps you need to take to become compliant with the IRS.
Three Steps to IRS Compliance
Filing late requires the same information as if you had filed on time. Very often people do not file timely because this step is daunting. Perhaps you do not have complete records, and it may take significant time to pull together what you have. As challenging as it may be, facing this will resolve the problem; avoiding it will not help.
1. Gather Up Tax Forms Sent to You
Gather tax forms such as 1099, W2s, or any other tax forms received. Put them in a folder. If you can’t find all of them, make a list of what you might have received and lost. You or your tax preparer can access your tax transcript at the IRS to obtain information from missing tax documents.
2. Calculate Your Private Practice Net Income
Calculate your total private practice revenue and expenses for the year. If you have accounting software, make sure all transactions are recorded and the profit and loss report is accurate. If you do not have accounting software, start with your bank statements and credit card statements. List the total revenue based on what you collected during the year, and list the expenses by category or type. You can refer to the tax deduction checklist from Simple Profit for common private practice deductions.
3. Contact a Tax Professional
A tax professional can ensure your late tax filing is done properly and possibly minimize penalties and interest. If you are using a professional for the first time, provide them with a copy of the last return you filed, if available. Before you hire, learn what questions to ask a tax professional.
If You Cannot Pay the Tax Due
The IRS offers installment plans so you can pay your taxes over time rather than all at once. If you have a very large tax bill that you cannot possibly pay over 10 years, the IRS may agree to an “offer in compromise” to accept an amount you can afford. Your tax professional can advise you on the best options for your situation.
If You Are Due a Refund
For years in which you are due a refund, the IRS does not require you to file a return. They will happily keep your money. However, it is wise to file anyway. If you are ever asked for past returns from a bank or court of law, you will be glad you have them. If you do not file within three years, the IRS can keep your refund forever, even if you end up filing later.
If You Have Multiple Years of Unfiled Returns
Having multiple years of unfiled returns can be daunting and possibly bring feelings of embarrassment, shame, or guilt. You may not know where to start and fear owing a significant amount. In many cases, filing the last 6 years of returns will achieve IRS compliance, though more years may need to be filed in some cases. The longer you avoid catching up, the more difficult the process will be. Commit to filing your returns now so that the problem does not get worse.
If You Have Received an IRS Notice
If you have received a notice from the IRS, inform your tax preparer so they can address it properly. The IRS is often willing to work with you if you are responsive.
Approach your taxes with the intention to pay what is owed, even if you need to pay over several years. The IRS is not interested in criminally prosecuting well-meaning taxpayers who have made honest mistakes and fallen behind. However, the IRS can take criminal action, including seeking jail time, against taxpayers who intentionally mislead or conceal information to evade tax. Always share complete and accurate information with your tax professional.
Once you are caught up and past returns are filed, make a new commitment to the future. Staying on top of your private practice accounting monthly will achieve two important goals: First, having timely information about your practice will enable you to better manage the business. Second, regularly updating your accounting records leads to easily filing your taxes on time and accurately.
