Does this sound familiar? A few years back your yearly earnings were pretty low so you figured you wouldn't owe any income tax. Thus, when April 15 rolled around the following year you didn't bother filing a tax return, knowing you wouldn't be penalized.
Even if your income fell below the threshold at which you'd owe anything, chances are taxes were deducted from your paycheck throughout the year. (Check your year-end W-2 form). If so, you probably left a sizeable tax refund on the table.
And you wouldn't be alone. The IRS estimates that each year close to a million people don't bother filing federal tax returns, thereby forfeiting around $1 billion in refunds they were due -- refunds that average several hundred dollars apiece.
Here's the good news: The IRS generally gives you a three-year window to go back and file a past year's tax return if you want to claim an unpaid refund. For example, to collect a refund for 2010 you have until April 15, 2014, to file a 2010 return. After that, the money becomes the property of the U.S. Treasury.
You can order current and prior year tax forms and instructions from the Forms and Publications page at IRS.gov or by calling 800-TAX-FORM (800-829-3676). If you're missing any supplementary paperwork (e.g., W-2 or 1099 forms), you'll need to request copies from your employer, bank or other payer. If that doesn't work, file IRS Form 4506-T to request a free transcript showing information from these year-end documents.
Keep in mind that if you file to collect a refund on your 2010 taxes but have not also filed tax returns for 2011 and 2012, the IRS may hold onto the refund until you file those subsequent returns. Also, past refunds will be applied to any amounts you still owe to the IRS or your state tax agency, and may be used to offset unpaid child support or past-due federal debts, such as student loans.
(Important note: The same three-year time period generally also applies when you need to file an amended tax return because you discovered an error on a previous year's return. See my previous blog, When You Should File an Amended Tax Return, for more details.)
Another good reason to consider going back and filing a previous year's tax return: the Earned Income Tax Credit (EITC). Chances are, if the reason you didn't file a return was because you didn't earn enough to owe taxes, you may have been eligible for the EITC, a "refundable" tax credit for low- to moderate-income working taxpayers. ("Refundable" means that if you owe less in tax than your eligible credit, you not only pay no tax but also get a refund for the difference.)
As an example, for tax year 2010, a married couple filing jointly with three or more qualifying children whose adjusted gross income was less than $48,263 were eligible for an EITC of up to $5,666. To find out how EITC works and whether you qualify, read IRS Publication 596.
Tax deadline approaches. For the rest of us, April 15 looms as the deadline for filing our 2013 taxes. At the very least you should request a filing extension by then; otherwise the penalty on any taxes you owe increases dramatically.
Typically you'll have to pay an additional 5 percent of taxes owed for each full or partial month you're late, plus interest, up to a maximum penalty of 25 percent. However, if you file your return or request an extension on time, the penalty drops tenfold to 0.5 percent per month, plus interest.
Here's how it can add up: Say you owe $2,500 in federal income tax. If you don't request an extension in time, you'll be charged an additional $125 (5 percent), plus interest, for each month you're late in paying off your bill. Had you filed for an extension, the penalty would drop to only $12.50 per month (0.5 percent) plus interest.
Be sure to contact the IRS early if you won't be able to pay on time so you keep as many payment options open as possible -- they may even waive the penalty, depending on your circumstances. Call 800-829-1040 or visit your local IRS office. Also check out this IRS website for helpful information.
One way to avoid this penalty is to pay by credit or debit card before the filing deadline. You'll be charged a convenience fee, which is tax deductible if you itemize expenses. (Fees vary depending on which payment processor you choose, but typically it's a flat-dollar fee of $2.49 to $3.95 for debit cards, or 1.87 to 2.35 percent of the amount charged, plus a convenience fee, for credit card transactions.) Just make sure you'll be able to pay off your credit card balance within a few months; otherwise the interest you accrue might exceed the penalty. To learn more, visit this IRS payment site.
Bottom line: If you skipped filing a tax return in the last three years, go back and crunch the numbers -- you may be pleasantly surprised by a hefty refund.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how laws apply to you and about your individual financial situation.
To participate in a free, online Financial Literacy and Education Summit on April 2, 2014, go to Practical Money Skills for Life.
More:Income Tax Late Payment Penalty Earned Income Tax Credit Income Tax Refund Amended Tax Return Financial Education
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