Should I file a tax return even though I’m not required to file?

Ralph
00:00:00

Do I even need to file a tax return? Listen, I hear that question all the time. Have you ever lost sleep wondering if you're not filing your taxes could come back to haunt you? Maybe you're making under the threshold and think, well, you know what? I'm in the clear. But what if I told you that choosing not to file, even when you're not required to file, could be costing you thousands of dollars in missed opportunities? Well make sure you tune in today because we're going to uncover the hidden benefits of filing and why it matters more than you might think.

Announcer
00:00:31

Welcome to the Ask Ralph podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now, here's your host, Ralph Estep Jr.

Ralph
00:01:00

Welcome to the show. I am so glad you joined me today. If you missed yesterday's show, I talked about what we call social inflation, and we talked about how that's impacting and skyrocketing insurance rates. We talked about why premiums are climbing, and I gave some practical advice to protect your wallet. So check it out if you missed it. And one of the things you could do is you can follow the show. Go to your podcast listening app, click follow, and then you won't miss a single episode. So I'm going to encourage you to do that today.

Today's question comes to us from Detroit, Michigan. That's right. We hear from Jessica. This is what Jessica had to say. She says, "Dear Ralph, I'm really worried I might've made a huge mistake. For the past three years, I've worked part-time at my local church's daycare center, making about $11,000 a year. Since I'm below the filing threshold, I haven't filed taxes. But recently, a friend mentioned that I might be missing out on significant refunds and I'm concerned about potential problems down the road. I can't afford the professional tax help, and I'm losing sleep wondering if I messed up my financial future. What should I do?"

That's a great question, Jessica. And I've got an answer for you here in just a moment. Now normal I tell you that this show thrives on your questions, but today I want to ask you some questions and I've built a listener survey because I want your honest opinion about the show.

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And let me tell you, your survey answers are going to have an impact. They really are going to shape the show moving forward. Now, listen, I need your survey completed by midnight on December the 10th, because come December 11th, we're going to draw that lucky person's name, and somebody is going to get that $250 Amazon gift card. So I'd love to hear from you. Again, you do the survey by going to askralphpodcast.com/survey.

You know Jessica, your situation reminds me of the book of Romans. It's one of my favorite books of the Bible. And I'm going to talk specifically right now about Romans chapter 13, verse 7, and it teaches us this. "Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor." So Jessica, see, it's all about handling our financial obligations with integrity and that's exactly what we're going to talk about today.

You know, I found some very interesting statistics when planning today's show. Here's some key statistics about non-filing of tax returns in the United States. Now this comes from IRS estimates. Recent IRS estimates say that approximately 8 to 9% of Americans who are required to file don't file each year. So these are the people who are required to file. They make enough income. They're supposed to file, but 8 to 9% of them fail to file every year. Now you might be saying, okay, what does that look like, Ralph? Well think about this for a second. That means that 14 to 15 million people are not filing a required tax return annually. So then I dug a little deeper and I said, well, what are the main reasons for non-filing? The first thing. Jessica, this is exactly what you're talking about. They had income below filing thresholds. That was 30 to 35% of the people.

Yeah. They're not legally required to file due to low income and that primarily effects part-time workers and retirees, Jessica, just like you. So these are the people I'm talking about now, who decided not to file even knew they had to. These are people that chose not to file. So that's 30 to 35% are those people like you that felt that they were below that filing threshold. The next are people who claim financial hardship. These are people who are unable to pay the taxes. They might, oh, they have this fear of penalties and collection actions. And that's 25 to 30% of non-filers fall into that bucket. The next one is the people who lost their W-2's, they lost her 1099s, they weren't keeping track of their records. It's one of the reasons I'm doing this show. And here in November, because I want to encourage you to get your stuff in order. So we call this the missing documentation group. And that's 15 to 20% of non-filers. And then we've got some people that are just procrastinators and negligent people.

That's 10 to 15%. That's the people who simply delay or avoid, you know, it's not uncommon for me to have somebody come in and I'll do five or six years of tax returns all at the same time, I'm wrapping up. One of those right now, a lot of people are confused about the process. But here's the sobering statistic.

This is the last group. And these are those people who are intentionally evading taxes. This is that deliberate non-compliance. A lot of times, this is people who have that underground income. That unreported income and they estimate that that's 5 to 10% of non filers. Well, let me tell you how about all of that data.

How does that data really impact real people. And I'll tell you about a client I work with. Again, I don't use real names. Let's call him Tom, and he worked part time. And Tom was below that filing threshold. So for five years, he didn't file a return. He thought he was being wise. He later said to me, Ralph, I thought I was saving money.

I'm saving time. And then for some reason, he came in to me for some financial advice, not really related to taxes. And one of the things I generally ask people say, well, let me see a copy of your tax return last year. I kind of think it's a way for me to open a door to what they have. I can see their income streams.

I can see what's going on in their lives. So I asked him about his tax filings and it stunned him. He said, what do you mean? What are my tax filings. And I said, well, based on what you're telling me, you probably should have been filing tax returns. And I said, even deeper than that, and this was part of that COVID situation where they were given out these free money.

Basically, I want to call these incentives. I figured out that he probably lost out on $12,000 in refundable credits. That wasn't just COVID money. It wasn't those advanced payments and all that kind of stuff. So you might be asking Ralph, what did you do? The first thing I did was I implemented strategic tax planning with him. We started talking about, yes, you need to file.

We started discussing what is the documentation you need? And then bigger than that, I started telling him, asking him about what he was doing. And he said, oh Ralph, you know, I'm going back in getting education. So he was missing education credits. And here's another guy. He was very charitable.

He had worked hard his whole life, had a nice savings account. But he was being charitable about it, but he wasn't taking any deductions for that. So we created some tracking for that. We also looked at his investments. Like I said, he put away money. He was wise in his stewardship and wise in the way he saved. So we looked at his investments.

We work with his broker, and I helped him set up some tax efficient strategies. So you might be thinking, Ralph. Okay. That's great for Tom, but why does filing really matter? Well, I'm going to answer that question right now. Here's why filing matters even when you're not required to. And that's kind of what we talked about at the beginning.

That was the big question I get all the time. Ralph, I don't have to file. Should I file? Well, the first reason why filing matters even if you're not required to is access to valuable credits. Those are those things I was talking about. Those recovery rebate credits, those stimulus payments. And that was huge.

A lot of people came out of the woodwork who hadn't filed in years because they heard about these stimulus credits, and it brought people back into filing. You might be missing out on things like earned income tax credit for if you have low income or if you have children. Maybe you're doing an education and there's education credits, there's child tax credits.

So you don't want to just say, you know what, I'm not going to bother to file, that cost too much money. I don't understand it. You might be missing out. That, like I said on number one, these valuable credits. Number two is financial documentation. Think about it. The first thing I asked this client was, let me see a copy of your tax return. Well listen, if you're not filing tax returns, let's say you go to apply for a loan.

How do you prove your income? Let's say you're going to rent a home. You're going to find a rental. The next thing they're going to ask you, well, we would get a copy of your tax returns. So if you're not doing the tax returns, you're going to have a more difficult proof of income such situation for doing loans and rentals.

Another thing you're going to be having a problem with is trying to figure out your social security benefit calculations if you're not filing those tax returns. Yeah. You might have been paying in through your W2 but you don't have that tax return on file with the IRS. And finally, and this is a big one. You might be missing out on opportunities for financial aid. Those financial aid applications, every single one of them, as far as I've ever seen, always require a copy of your tax return.

That's at financial documentation. So like I said, number one, missing out on valuable credits. Number two is that financial documentation. Now here's what a lot of people don't consider. This is what I call number three. And this filing is a protection against identity theft. You might be saying, Ralph, how's that possible?

Well think about this. If you're not filing, someone very well could be filing using your information. And I've seen this happen time and time again where a person comes in and file. We file a tax return, and we get a kickback from the IRS that says, hey, guess what? We've got a duplicate return file for you this year. Now that's a case where the person was already filing, but somehow someone stole their identity, and they filed a tax return.

Well, guess what? If you're not filing those tax returns annually, then you might not be aware of that identity theft. It also helps you with future IRS inquiries, because if the IRS sees that you've been filing every year, then they're not going to inquire about, well, you know, Mr. Jones, how come you didn't file for the last three years.

And they're also, if you don't do these things, you could be missing out on tax advantage investments. And that's a topic for a whole another show. But I think that we have to really think about that. That identity theft, that protection against that there's IRS inquiries.

There's missed opportunities. Well, number four on my list here is building financial history. Again, let's go back to that thought of mortgage applications. They're going to ask for your last two years of tax returns. Maybe three or four years of tax returns. Maybe you're in business and you're trying to get a business loan. Again, they're going to look for those tax returns. Same thing with credit applications. They might want to look at your W2. That's great. But they also might ask for your copies of your tax returns. So that's number four. By not filing, you're really making these large gaps in your financial history. And the final thing I have on my list today, number five is long-term benefits. Think about this. If you're not filing a tax return, you might not be taking advantage of retirement account contributions.

You're not getting advantage of taking an IRA deduction. Or maybe a health savings account HSA. Another thing. And a lot of people don't think about this one either is if you're not filing a return and let's say you're in between that age where your work, where you're not working or maybe you're working part-time but you don't, you haven't reached 65. So you're paying for healthcare through the marketplace. Well, guess what? If you don't file a tax return, you might be missing out on that health care credit that you could get on your tax return and those marketplace subsidies. Now I got to say the marketplace does a pretty good job of proving you and asking how much your income and all that sort of thing is.

But if you don't file that tax return, then what happens is that 1095, we'll get in the weeds here for a second. But when you own the marketplace, whoever your insurance is through at the end of the year, they send in a form that's a 1095-A form. And it basically lays out who was insured. Was it your wife?

Was it you, do you have children? And then it talks about how much was your premium each month? What was your premium credit? Well, then when we file your tax return, we've got to put that information on your return to see if the credit was correct. A lot of times you'll underestimate the amount of your credit.

And when we do your tax return, it's found money. So that's another thing you don't want to miss. Those healthcare marketplace subsidies are all based on that tax return. And finally, I talked about this a few minutes ago under this long-term benefit category is that social security earnings record.

If you're not filing, the IRS isn't matching up your data with the social security administration. And you could be missing out on building up that retirement nest egg in social security. And listen, I don't think social security is the end all be all and the best investment for your future. But if you're not doing that, you're missing out on that.

So now let's talk about the impact of not filing. We talked about why people aren't filing. We talked about why you might want to file. But let's talk about the impact of not filing. And let me be clear about something. This keeps me up at night when I counsel people about taxes. While you may not be required to file, if you actually do owe taxes and fail to file, the consequences can be severe. I'm not understating.

These consequences can be majorly severe. Let me break this down for you. First thing. The IRS can charge you financial penalties. They can charge you what's called a failure to file penalty and listen, that's 5% of the unpaid taxes for each month you're late. They're going to also charge what they call additional failure to pay penalties.

And that can be a half a percent per month on what you owe. And here's the thing a lot of people don't know, but that interest compounds daily on both unpaid taxes and on penalty. So think about it. They add the taxes that you owe, then they add those penalties and then they wail you with interest on top of that, that compounds daily. And the truth is when you look at the big number, these penalties can accumulate up to 25% of your unpaid taxes.

So that's the first thing. It's a consequence, financial penalties. Second thing. Number two. Loss of tax benefits. You might be missing out on valuable tax advantage investment opportunities. We talked about that a little while ago. Maybe you're not being able to put money into that IRA or that health savings account. You could be losing the chance to maximize deductions and credits that could hopefully benefit your financial situation.

Look at that client, Tom, I talked about. He was being very charitable, but he wasn't filing a tax return so all of his charitable contributions weren't helping him at all, and he could have offset his income and qualified for credits. And the big picture thing of this, it could potentially disqualify you from certain tax efficient investment strategies in the future. If you're not filing, you don't have the ability to take advantage of those things. So like I said, number one, financial penalties, number two, loss of tax benefits. Now let's look at number three and that's what I call the long-term consequences. And if you don't file, let's say you decide I'm going to go apply for a loan.

I'm going to go apply for a mortgage. They're going to ask you for copies of tax returns. And if you don't have them, that could make it difficult for you to qualify. You might have problems with employment background checks if you haven't filed your returns. You're definitely going to have issues with accessing government benefits, because one of the first things they look at is your tax filing history. Like we mentioned, you're going to have those issues with social security benefits down the road. And it can also complicate with future tax situations. So let's say for some reason you haven't filed for four or five years, and then something comes up, maybe you took a distribution from a retirement plan, you got an inheritance that's taxable, something like that.

So you file that tax return because maybe you're due a refund and then the IRS goes, wait a second. You haven't filed a tax return in five years. And they open up an investigation of what they call an audit, and they start going after you for those years you didn't file and they're holding up your refund. So that's one of the things that I got to stress today is there are long-term consequences for not filing. Number four. This is where the gold badges and guns from the IRS come out.

This is the legal ramifications and listen. In extreme cases, particularly where there's at willful evasion, as we talked about, you're intentionally not filing because you don't want to pay. You have shady income, whatever that looks like, maybe it's fraud. Well, let me just tell you what the consequences of that can be, and I'm not trying to scare you, but these are true consequences.

You can be brought up on criminal charges. They will prosecute you for tax evasion. A lot of people don't know this, but what put out the gangster in jail, it was not racketeering and all that stuff. It was tax evasion. It was not reporting income on his tax return. That's what the government finally got him on and put him in jail. Another thing they can do is they can file federal tax liens on any property that you own.

Maybe you've got a house it's paid off. You don't owe anything on it and then you're not filing tax returns. Well, the IRS could very well put a lien on your property. If they're going to assess these penalties, and these interest, they can attach your wages. You know, but you're working at part-time job and all of a sudden the person in HR calls you and says, Hey Sally, guess what?

We got a letter from the IRS. And I got to take 85% of your pay from now on until you get these issues resolved. And then the other thing a lot of people don't know is they can actually levy your bank account. Yes, that's right. They can go to your bank and say to your bank, Hey, Sally's got an account with you.

We want that money. Now, it's not an immediate thing. You'll get notification of it. But trying to unwind that can be distinctly problematic. So those are the things you want to avoid. Those are what I called the legal ramifications. That's when you get that visit from the IRS, those guys with a gold badges and guns.

That's not a visit you want. And last but not least. It really can have an impact on your financial future. Like I said earlier, I've said this a couple of times. You could be missing out on opportunities for retirement account contributions. You might be losing potential for building wealth through tax efficient investments. It leads to this difficulty establishing a solid financial foundation. And to be honest with you, I told you with James, it makes it challenging to do financial planning. And here's the thing a lot of people don't know. Most people don't know this. The IRS has no statute of limitations on unfiled tax returns. I'm going to say that again. The IRS has no statute of limitations on unfiled tax runs. A lot of people don't know that. Now you might be saying Ralph, what does that mean? This is what it means.

It means they can come after you at any time if you owe taxes and haven't filed. That's just the truth. Now, if you file tax returns and you owe money, there are statute of limitations for that. They can only come after you for a certain time. I'm not going to talk about that today, but if you haven't filed, if you are noncompliant, there is no statute of limitations.

I've actually had situations where a client hadn't filed for 10 years. We went ahead and filed a tax return. And then the IRS went back 15 years looking at the information that the client had because he hadn't filed and there was no statute of limitations. They were able to assess taxes back 15 years. So here's the key takeaway.

If you don't listen to anything else that I said today, It's always better to be proactive and file, even if you're unsure about owing taxes. Listen, even if you owe taxes and can't afford to pay it. It's always better to file. I tell people this all the time. Look. Not filing is a criminal situation. Owing the IRS is a civil thing.

The IRS will work with you. They'll set up payment plans. There are things you can do. But you don't want to be sitting in a federal prison because you didn't file a tax rate. And it's not my goal to scare you today. I just want you to understand the ramifications of that decision.

Well, let me change the subject for just a moment. If you're listening on the release date of this show, I want to wish you a very happy Thanksgiving. Today as we gather with our families to celebrate Thanksgiving, I just want to tell you I'm reminded that gratitude serves as an essential catalyst for cultivating a positive mindset in both our financial and our spiritual lives. It's a Christian podcast.

So just as the Bible teaches us countless times about expressing gratitude, this special day gives us a moment to pause and reflect on our blessings. You know, managing finances can often feel overwhelming. That's what a lot of people tell me. They say, Ralph, this is what you do. I don't know how you do it, dude.

It's overwhelming to me. But when we practice gratitude, when we're thankful, we train our minds to focus on what we have rather than what we lack. And that's a mindset shift, and this mindset shift is particularly powerful when dealing with financial challenges. That's what a lot of my show is about. People send me questions about financial challenges. But if we have that mindset shift of gratitude, it enables us to appreciate our blessings and find joy even amid difficult financial situations.

So on this Thanksgiving, I'd like for us to pray together. "Heavenly Father, today, we come before You with hearts full of Thanksgiving. We're grateful for Your unwavering presence in our lives, knowing that even during financial uncertainties, You promise to strengthen and help us. Lord, we thank you for being our source of wisdom when making financial decisions. Just as You tell us not to worry about what we shall eat or drink, we trust in Your provision for all of our needs. We're thankful for the opportunity to grow in both our faith and our financial wisdom. Thank You for providing us with tools, resources, and the understanding to make sound financial choices. We're grateful for the clarity You provide during moments of uncertainty. For those of you who are listening, who are facing financial challenges, we pray for Your peace and guidance. Lord help them to trust in Your plan and approach their challenges with confidence instead of fear. I thank You for this wonderful community of listeners who seek to honor You through their financial decisions. It humbles me, Lord. Grant us all wisdom to be good stewards of the resources You've entrusted to us because they're not ours. We know that. We pray this in Jesus' name. Amen."

Now I'm going to share some action steps with you, because I know I dropped a lot on you today if you haven't filed taxes or if you need help doing that. But first, you know, I guess it's officially the Christmas season now that it's Thanksgiving. So let me ask you this. Are you losing sleep wondering how you'll afford everything on your holiday list this year?

Listen, you got a shorter amount of time now. Are you tired of starting every new year, buried under a mountain of holiday debt? Start that year and you're buried under that mountain of holiday debt. Are you looking to create magical Christmas memories without the financial stress that usually comes with them and tell me, it can be a stressful time of year. Well I want you to discover peace of mind.

And I did it. I'm going to help you by doing that. I wrote what I call survive in the holidays without going broke. It's a guide that's free to you. And in that guide, you're going to learn a proven budget system that actually works. I'm going to share with you some smart shopping strategies that will help you slash your costs. I'm going to show you ways to make magical memories without maxing out credit cards. Another part of the guide is teaching your kids gratitude.

We just talked about gratitude. Today is Thanksgiving. We should all be grateful. But I want to show you how to teach kids gratitude in this gimme more world. And finally, I want to show you how to keep faith and family at the center of your celebration. Listen. Don't let January's credit card bill steal your holiday joy.

Download your free guide now. It's very easy to get it. You go to askralphpodcast.com/christmas. And make this your most meaningful and dare I say, affordable holiday season yet. Your stress-free holiday season starts here. Again, that's at askralphpodcast.com/christmas. Well now let me share some of those action steps I promise with you. First thing you need to do if you find yourself in this position where you haven't filed tax returns or you're thinking, well, you know, maybe I should have. Number one thing. Gather all of your income documentation from the past three years. That would be things like W2's, 1099s, inter statements from the banks.

If you got any kind of unemployment. Any of those things gather all that information together. And then look, I'm not trying to have you spend money. There are free tax preparation services at local community centers that can help you. Reach out to those people. If you've got complicated things, I'm going to encourage you to reach out to somebody like me.

So number three, consider filing previous years' tax returns. Listen, even if you didn't do them, this isn't the time to hide from that. You've got to embrace that and embrace it head on. Go and get those tax returns filed for previous years. Like I said, I just finished up working with a guy. We just did about seven or eight years of tax returns for him.

Yes. He's going to owe money cause he hadn't filed. But now he's in compliance and there's a big difference. So it shifted from being a criminal issue where he hadn't filed to truly a civil issue. And then what I'm going to encourage you to do is start maintaining those organized records so that you don't fall back into this habit. And this guy I'm talking about, I just finished his 2023 return and we're already looking at 2024.

He tells me he's going to schedule right away. So I'm going to encourage you to do the same thing and listen, if you need help, schedule a consultation with a tax professional. You can book a call with me by going right to my website. Now tomorrow, I'm going to tackle an interesting question about mortgage overpayment and whether it's a wise financial move in today's economy.

A lot of people ask me about this question. So that's one you don't want to miss if you're considering paying extra money on your mortgage and listen, you could save thousands of dollars. Remember this. My passion is to help you achieve financial success. I want to see you live out your dreams and grow in your faith.

And I know working together, we can master your finances from a Christian perspective. So I say, happy Thanksgiving. I gave you a little bit longer episode today, but I truly am grateful for all of you who stay, and you listen to my show. And you grow our community. I am truly grateful for you. So thank you. And as I always end the show, I want you to stay financially savvy out there and on this Thanksgiving day, may God bless you abundantly.

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00:27:11

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