Dear Equity Search

Dear Equity Search:

I owed $5,000 in personal income taxes from two years ago. I couldn't pay it. With penalties and interest, that amount is now $6,700.

I now have a new problem. When I prepared my return this year, I realized I owed another $5,000. I had an extension to file it but I missed the deadline. I am afraid of what the IRS may do now if I file it. I have $4,000 in savings. My attorney said I should use this for payment toward my oldest return. What should I do?

Signed,
AFRAID

Dear Afraid:
The first thing you must do is file your return. The IRS is less concerned if you owe $50,000 on a return that is filed, than if you owe $1.00 on a return that is not filed.

Because the IRS holds dearly that every taxpayer be compliant and current, Congress has allowed the IRS to impose large penalties for failure to file. You are hurting yourself more by not filing any outstanding returns because of these penalties.

In addition, the IRS can make a criminal case against you when you do not file any return. Most criminal intent falls off when you file a return and make a contact to at least say "I can't pay".

The next question is where to designate the money you do have. Pay current liabilities first. If you are going to owe next year, pay next year’s estimated payments with your $4,000.00. Stop the snowballing effect or you’ll never recover! The IRS is not bugging you about next year’s taxes, but it will, and it will be much worse. If you won't owe for next year, pay last year’s taxes when you file your return.

Sincerely,
EQUITY SEARCH