I am sure that everyone reading this blog files their taxes every year on time. Inevitably, though, there are a few doctors that do not file a tax return, most often because they do not have the money. Then they are stuck in a quandary. Should they bite the bullet, file the return late and then deal with the taxes and penalties when money is available? Or should they wait until they have the money saved to pay the tax and penalties and then file?
The answer is to go ahead and file, even if you don’t have the money. There are different penalties for not filing a tax return and not paying the tax due. The late filing penalty is 5% per month up to 25%, whereas the late paying penalty is only 0.5% per month up to 25%. The late filing penalty is ten times greater than the late paying penalty for those first five months, so avoiding the late filing penalty is crucial. More importantly, its a crime to willfully fail to file a tax return, but it is much less likely to be considered a crime to not pay the tax due. Finally, from my experience, people who wait to file a tax return until they have the money available to pay the tax never end up filing, as by the time they have saved enough money to pay one year’s worth of tax, another year has passed and now they owe two years’ worth of taxes that they cannot afford to pay, and it compounds from there.
Whatever you do, do not delay filing another tax return in hopes that you will come up with the money to get caught up. It may take two, three or in some cases ten or more years for the IRS to find you, but they almost inevitably do. Then not only do you owe taxes on all of those years, but the penalties (more likely to be the 75% fraud penalty at this point) and interest will end up being more than the tax, if not closer to double the tax. Also, the ability to bankrupt your tax debt or have the ten year IRS collection statute of limitations expire both depend on filing the return in the first place.
If you are in this situation, then the first thing you need to do is hire a tax attorney. The tax attorney will likely hire an accountant to help prepare the returns, but at that point you have your team in place to get caught up and handle your communications with the IRS. Then you want to get the returns filed as quickly as possible. Finally, focus on making sure your taxes are paid for the current tax year and then work backwards from there in terms of which tax year to pay. A tax year that is 4-5 years old will have likely accrued the maximum failure to file and failure to pay penalties, but the current tax year will be penalty-free, so focus on avoiding penalties for that tax year first by being current on tax withholding and estimated tax payments. Then focus on the most recent tax year since it may still be possible to avoid the maximum failure to pay penalty.