Filing Without All Your Tax Documents? Why It’s Risky and How to Get What You Need?

Ralph
00:00:00

So here's our question for today. Is filing your taxes without all your documents really that risky? Today we're going to find out how it can cost you more than just penalties and interest. Plus, we'll discover how one listener's hasty filing decision led to a financial nightmare. Stay tuned to learn how to get all of your tax documents and avoid these pitfalls.

Imagine filing your taxes, expecting a quick refund, only to find out you're missing crucial documents. What happens next? You could face penalties, you could face audits, and even legal consequences. But don't worry, I've got you covered. Today, we're diving into the risk of filing without all of your tax documents and I'm going to share proven strategies to get the paperwork you need.

So, if you're wondering, to a question today is, is it okay to file my taxes without all my documents? Today's episode is for you. I'm going to encourage you to keep listening.

Podcast Announcer
00:00:54

In a world where crushing debt keeps you trapped, where living paycheck to paycheck has become your new normal, and where the dream of retirement seems impossibly out of reach, there's hope. Join financial evangelist Ralph Estep Jr. A man who's walked through the fire of financial failure and emerged stronger on the other side.

Welcome to Ask Ralph, the show where real world experience meets biblical truth to break the bondage of financial despair.

Get ready to take control of your money, break free from the financial stress and align your resources with God's purpose for your life. This is Ask Ralph with Ralph Estep Jr.

Ralph
00:04:56

Welcome to the show where we're mastering your finances from a Christian perspective. I am absolutely thrilled you're here. I'm so happy that you've chosen to spend some time with me.

And if you missed yesterday's show, we talked about inheritance incoming. Are you ready? I encourage you to check it out because I packed it with insights for preparing for unexpected wealth, or just if you get one of those inheritances, you weren't expecting, I actually shared my own story.

So I'm going to encourage you to check it out. You go to askralph.com. You'll find all of our previous episodes there. Now, today we're tackling an issue that many of us face during tax season and that's the decision to file without having all your tax documents ready. So before we dive in, let's hear from one of our listeners who encountered this very problem.
Well, today's listener question comes to us from Ernie and Ernie wrote this. He said,
Dear Ralph, I'm at my wits end. I filed my taxes early this year because I desperately needed the refund to cover some unexpected medical bills. I was in such a rush that I forgot to include my 1099 from my side job.

Now, I'm terrified of the consequences. I can't afford to pay any penalties or interest, and the thought of an audit is keeping me up at night. What should I do?" And that was signed sincerely, Ernie.

Now listen Ernie, I get it. I completely understand that stress and fear because listen, I do this every day, but for other people, tax season can be overwhelming and it's tempting to rush through that process, especially when you're expecting a refund to cover those urgent expenses.

I know in my own practice, there's a lot of people that they start making those appointments as soon as they get that first document. And I always encourage them to say, you know, let's take a step back. Let's make sure we've got all of your documents before we get started. So Ernie, I'm going to assure you there is hope in this.

I'm going to help you navigate this situation, but first I want to explore the risks you're facing. And while filing without all of your documents is a big, no, no. If you hear nothing else today, don't do that. And then I'm going to discuss some concrete steps you can take to rectify the situation

if you've already got yourself in that position and ensure you on ways that it doesn't happen again. So does that sound good? Well, if it does, let's get started.
Now, just like Ernie's question, remember, if you've got a question for this show, this is what the show is all about.

It's all about answering your questions. And if you've got one of those finance related or tax related or budgeting or faith related questions, I'm going to encourage you to go to justaskralph.com. You go there, it's really simple. You put your name in, you put the question in there and it'll shoot it right to me.

And I'll use your question on a future show. And don't forget, every Tuesday, today, as a matter of fact, if you're listening to this on Tuesday, we go live. Now we used to go live at 7 PM, but we switched out to 1 PM, got a lot of listener feedback. So every Tuesday at 1 PM Eastern time, you can catch me live.

It's an opportunity to get your questions answered. You can interact with our community and it's real simple to get to it. You just go to askralphpodcast.com/live. Again, it's real simple. You go to askralphpodcast.com/live, and it'll take you right to our site.
Well, you know Ernie, I like to start the show grounding ourselves in scripture because as Christians, we're called to act with honesty, we're called to act with integrity in all of our dealings and that includes our taxes. So I found this verse in the book of Proverbs and it's chapter 11, verse 3, it says this. "The integrity of the upright guides them,
but the unfaithful are destroyed by their duplicity." Now it's a lot of words there, but this verse is a reminder that our financial actions, they need to reflect our faith because when it comes to filing our taxes, it might seem like a routine and mundane thing. But we've got to do the right thing.

We've got to ensure that we're actively reporting our income and we're paying what we owe. Now listen, my goal as an accountant, as a tax professional, is to help you pay as little as possible, but you've got to pay what you owe. And that whole concept of that, that perfectly aligns with our Christian values but it also, bigger picture thing in that, it also helps us avoid potential legal and financial troubles. And listen. I've dealt with clients who have gotten themselves into that financial jam with the IRS and even sometimes that's hit legal. So that's something you want to avoid.

So before we get into the episode, I want to just tell you what I'm grateful for today.
I'm grateful for the opportunity to help people like Ernie and all of you who are listening, navigate the complexity of the tax filing with honesty and with integrity. So let's get to our main content and address Ernie's concerns today.

Well Ernie, I want to start by telling you about a client friend of mine named John.
Now John was an eager guy, just like you, Ernie. He wanted to get his taxes filed early because he loved getting his refund quickly. So that was his normal way he operated when, as soon as he was able to file that tax return, he would get that return file. Yeah. One year came along and John wasn't paying attention and he filed his tax return without attaching his 1099 form.

And I will be doing a show next week about what are 1099s, what are the different types, but that's basically someone has reported income under your name. Now, in this particular case, John said, Oh, you know, I'm not worried about, it's not gonna make much of a difference. And this particular 1099 had come from a side job.

He was doing some freelance writing work and he didn't think the income was big enough. Oh, you know, he said to me after the fact, he said, Ralph, I remember it was $1,500 or $2,000 or something like that. And he says, I'm not even worried about it. And this is before I met John where he came in and became a client and became a friend of mine.

Well, fast forward a few months, actually for him, it was more like 12 months. And he gets this letter from the IRS. You know, he went out to the mailbox. He sees this letter looks very professional. He opens up the letter and it says, John, guess what? I'm calling, I'm writing to you from the IRS. And we've got a problem here.

Your tax return did not include some income that was reported under your security number. And they said, guess what? We're going to charge you a penalty. We're going to charge you interest because you did not report your full income. Now, John took a look at this letter. He absolutely didn't know what to do.

He was devastated. He got on, you know, he looked online and he looked up, he found my information, gave me a call, set up a consultation. And the problem is, I remember when he came in and sat down, he said, Ralph, he says, listen, I didn't do anything intentional, but the IRS is making it seem like I intentionally misled them about my tax returns.
And I could just see the stress on this dude's face was overwhelming. And he finally realized, he said, Ralph, it was such a silly thing. I was in such a rush to get my refund. If I had just waited to get that 1099 and put my stuff in order, I could have avoided all this. And see, here's the problem.

John's particular situation started to spiral out of control. Well, I was able to help him manage that, but here's the thing where I say it's spiraled. The IRS imposed a 20 percent penalty. It's what they call their accuracy related penalty for underreporting his income. They were basically saying, look, dude, we'll charge you a penalty because you intentionally filed a false tax return.

And on top of that, they hit him with what they call the failure to pay penalty which increased every month while he didn't pay the amount that he owed. And guess what? The third whammy to the whole thing was they started adding interest from the date the tax return was due. In other words, from April 15th of that year.

And that interest has kept on accruing, which was just that compounding financial and stressful burden on it. And then if things couldn't get bad enough, John became the unlucky winner of the audit lottery. And I'll tell clients all the day, you don't want to be the unlucky winner of the audit lottery.

So the IRS decides to audit John. And now they're looking for his receipts. They're looking for documentation. I mean, they did what they call a total compliance audit. He had to prove every single item on his tax return. Now I can't say that he got audited because of the fact that he didn't report that income, but I truly believe that was a big part of it.
And this became a stressful, this became a time consuming process. Again, think about it. All because he didn't wait to get all his docs in order. He didn't wait to get all his documents ready. And here's the big problem. During that IRS audit, the IRS actually disallowed some of his deductions he had taken.

And I don't recall exactly what it was. I think he had some deductions for some equipment that he bought for his freelance. I think it was a printer or some software. And he also had some charitable contributions and he frankly didn't have the paperwork to support it. And the IRS said, well, then we're going to disallow it.

And that's what they do. And then all of a sudden that problem, like I said, the reason I said it spiraled out of control, that problem, it seems so small. That overlooking of reporting that income resulted in a much higher tax bill and additional penalties. Man, they threw the book at him. And then all of a sudden, John's like he's in financial shambles.

The IRS wanted their money and they wanted it now. So what did John have to do? He had to go take out a loan. He had to take out a loan to pay off the IRS and that burdened him with a significant amount of debt, that debt really made him, it was like a noose around his neck.

It made it very complicated for him. And the emotional toll was immense. And I remember John saying. He says Ralph, I don't know how i'm ever going to recover from this. Well Ernie. The good news is, we were able to solve that problem for John. We worked it out. He got a loan. He paid off his taxes, but I want to talk to you now about why it's so important.

What are the risks of filing without all your tax documents.
And I mentioned these when I talked about John. The first thing. The IRS can assess what's called an inaccurate tax liability penalty. Because here's the thing. If you don't know all of the things that are supposed to go in your tax return without all that necessary information, you're going to miscalculate your tax liability.

So think about John. He's the perfect example of this. If you forget to include a 1099 form that reports income from that side hustle you have, you could end up paying, under paying your taxes because you didn't include that. And that could lead to those penalties, this accurate related penalties, those Understatement of income penalties and then they add the interest and it maybe it triggers an audit. Which leads me to the second thing. That's penalties and interest. The IRS will impose penalties for inaccurate filing, for incomplete filing, and these penalties can be significant. Like I said, in John's case, it's 20%. Well, let's just say he owned, he owed $10,000. Well, adding a 20 percent penalty onto that, that's $2000 bucks. So that $10,000 that we started at is now $12,000. Plus they're going to add $10,000. The failure to pay penalty, that's 5 percent a month up to a cap.
Then they're going to add the interest. So it's like the never ending debt and it just further adds to your tax bill. And as John found out, I truly believe this can lead to audits. Because I believe a hundred percent that filing without all the required documents will increase your risk of getting an audit.

And then all of a sudden you're in a whole different situation because during that audit, you're going to have to provide documentation to support the information on your return. You know, that receipt for the office warehouse like staples or something like that. Where's that receipt? You know, where's those receipts for those charitable contributions?
Where's those receipts for that travel that was business related. And here's the problem. If you can't provide all that paperwork to the IRS and the burdens on you. See, I've said this before on them. At the moment you press that button to file your return, if you pay somebody to do it, or if you mail it in, the minute you file that tax return, the IRS is assuming that you've got all of your documents. You've got all your paperwork in order because you're basically making that attestation when you sign that return, that this is a true and correct, like people don't understand it. It's kind of like a contract with you and the IRS.

You're making this attestation that your return is in order. You've included all of your information, and I hate to say it this way, but if you don't include stuff that you know you should have included, that's intentional, that's willful. And if you get into that audit, they could disallow your deductions.

They could disallow your credits, and then that problem that you had, 'cause first you started by not reporting the income, then they added that accuracy penalty. Think about it. It just grows and grows. Now, the other problem is let's say you're in that position where you're expecting a refund. But if your return's incomplete, that can delay the process of your refund.

I see this a lot of times with people on the health insurance marketplace. They'll come in and get their taxes done. And I'll say to them, Hey, don't you have insurance through the health marketplace? Well, yeah, Ralph, but I can't find that 1095-A form. Hey, can't we just file the return? You know, let's get the return done.

Now I personally, I won't do that because if I know there's something that should be on their tax return and they're not including that, I'm going to say to them, listen. I can't ethically file your tax return, but sometimes they just do it on their own. And if you don't include that notice, they are going to delay your refund.

And I truly believe it works like this. I think they process the returns that are accurate first. Everything else goes into a bucket somewhere at the IRS and those things get worked when everything else is done. And see that leads to further frustration. And especially if you're relying on that money, because a lot of people will say to me, well, I want to file my return right away to get that refund because I've got those medical expenses.
Like Ernie, like you talked about, or I've got this trip that we're planning, or I want to get this done because of X, Y, or Z. Well, if you're not thorough and you don't include all the things that are important for your tax return and your doing refund, I guarantee it's going to get delayed. Now, another problem.

The other thing that IRS can do is what's called a substitute for return. Now this is completely the opposite situation. Let's say you decide, you know what, I'm not filing a tax return. Well, what the IRS will do is they'll do what's called a substitute for return. It's called an SFR. And what they'll do is they'll basically take whatever information was reported under your social security number.

So if there was a 1099 for some side work, if there was a W2, if there was interest statements, whatever those things are, the IRS is going to say, well, we gave them an opportunity to file a tax. Now this isn't one of those immediate things. Generally, from my experience, this is two years or three years after the filing date, but they'll actually say, Hey, we never got a tax return from, you know, from Juan, for example, you know, why didn't Juan file?

Well then, they're going to do this substitute return. Now you might say, okay, Ralph, great. They're going to have to substitute return. Saves me money. Not exactly because they don't have all of your deductions. They don't have all your credits. They're going to end up charging you more because they're just going to show the income with no deductions.
I see this a lot of times with people who had stock trades at 1099-B for them. Again, Like I said, I'm going to talk about those in a week or so, but let's say you had a brokerage account and you sold stock and you came in to get your taxes done. You did your taxes yourself and you totally forgot about that.

You had some capital gains in there, but what the IRS will do is they'll turn around and say, Oh, we're just going to file a return in your name. But here's the problem. They assume that all of that money that you got in that stock trade was profit for you. They don't give you any value in what you paid for those stocks.

Well, guess what? Now we've got higher tax, we got higher penalties, we got higher interest, or if you were to do a refund, they're going to cut your refund back. So that's really a big deal. And that's a consequence for not filing your return. And like I said, that decision of not filing return, and I mentioned it today, we're talking more about refunds, but I just want to reiterate the importance of this because the IRS can do that substitute return. They could garnish your wages. They can file liens against your property. And here's the thing a lot of people don't know. They can actually revoke your passport, depending upon how much you owe them. Now let's talk about the legal consequences. This is both for filing a tax return that's inaccurate. Following one that you know, doesn't have all of it's documentation. There are significant legal consequences to this. Because they can say there was intent. If there's intent, then we've got tax evasion. And that goes beyond, you know, like civil things. They're not just going to come after you for money.
These are when the guys with the gold badges and guns from the IRS contact you and say, Hey, we got some problems here. This is the tax evasion cases. These lead to criminal charges and they have put people in jail for this. Check out the news and you will see people who have been made examples.

There are some high profile Hollywood celebrities who have been made profiles of what this looks like for evading taxes. Now, some of the times, it was because they didn't file. Sometimes it was because they didn't put all the information in return. Sometimes they lied on their return, made up all kinds of bogus information.

But I just felt like it was a good idea to mention that because if you, and I get, it sounds petty. Maybe you've got this bank account and you can't find the interstatement for it. So you just ignore it. You just don't put it on the tax return. 9 times out of 10, if it's a small amount, the IRS is going to send you a bill and say, Hey, Ralph, you forgot to record this. But the problem is it does get to the level that you intentionally, you willfully filed a false tax return. So I'm going to encourage you, if you don't listen to anything else today, listen to those things. Well now, I want to talk about some of the most common tax documents because, you know, I talk tax jargon, but a lot of people don't live in that world. So let me talk about a few of those things.

Now, the first one is probably everybody knows about this. This is that W-2 form. That's that one that your employer gives you that you've been earning pay all year. You get to pay stubs every week.

And then at the end of the year, and it is what a lot of people are waiting for you. You'll win as my W-2 going to be ready. This is provided by your employer. Now, most imes from what I see now, you've got an online portal where you go download that, but it reports your wages and the amount of taxes would tell it from your paycheck.

Now here's a little pro tip. Open that thing up, print it out, take a look at it because I have had several situations where a client has come in to see me in February or March and they hadn't even opened up the envelope, if they got it mailed to them or they hadn't even looked at their W-2 and I said, Hey, there's a problem here.

Why did they take this state tax out when you live in this state? Or why did you have no federal atoning? I'm going to talk about that on a show coming up in a week or so about what happens if you messed up your W-4. So that's really the form that a lot of people know about. That's that W-2, that wage and tax statement.

If you had a job, you're going to have to have one of those W-2s. Now, another place where people miss out on this. If you've had multiple jobs, let's say you had little like a side job or a part time job or a temporary job. You've got to make sure you wait to get all of those W-2s. And I'm going to talk in a few minutes about how to get those things if you're missing them.

Another one we talked about was that form 1099. And there are several types of 1099 forms. I think there's 22. I'm not going to talk about those things. I'm actually going to cover those in another show, but each of those report's a different type of income. For example, there's the 1099-INT. That's the one you get from your bank that shows interest income.
There's a 1099-DIV. That's the one you get from your brokerage, which shows your dividends. And then there's a 1099-NEC. That's if you did some side work, you had a side hustle and somebody sent you a 1099 for contract work. So it's really important if you've done any of those things, if you have a bank account, if you have a brokerage account, if you've done it in a side business, like the 1099-K is a big one.

That's where if you did any online sales through Shopify or through Venmo or any of those cash apps. Now, if it's over a certain amount, I think it's $5,000 for 2024 returns, but then it's dropping to like 600 for 2025 returns. And I'll talk about that in a week or so as well. Another big one that a lot of people have, and that's that mortgage interest statement.

It's actually called a form 1098 and this form is crucial for determining whether you're able to itemize your deductions or take the standard deduction. Now this form, it's not complicated. It just reports the mortgage interest that you paid during the prior calendar year. Usually it also has your property taxes on that.

So that's one of the things that you definitely want to have before you get your taxes done. Another form, the 1098-E. If you were in college and you've got student loan interest, again, this is a form that the student loan company is going to issue to you that shows how much you paid in interest during the prior year.

So wait to file your tax returns before you get that form. You may have to go digging for, you may have to go to their website. A lot of times these people aren't mailing these things out. Now that's just the big ones. There are other documents that you may need to have and it depends on your circumstances.

There could be receipts from charitable organizations. Maybe you need to compile your medical expenses. Maybe you've got some business expenses and that's why record keeping is so important. So let me just ask you a question. You know, what steps do you need to take to keep your records organized? You know, one of the things you can do is you can share those tips with us.

You can go make a comment on our Facebook page, or you can make a comment in our YouTube page, but see, this record keeping is essential for tax preparation. You got to keep those accurate records of your income and expenses. And you want to do that throughout the year because you don't want to have that problem at the end of the year where you're trying to figure out what happened.

Another thing you want to do is keep track of your pay stubs. You know, keep track of that pay stubs. And one of the things is funny, I had a call yesterday. It's actually, it started as an email, then it got to a call and it's one of my clients we do payroll for. And one of their employees had gone and got their taxes done.

And one of these people that rushing out to get it done right away, which I respect that. That's cool. And they went to their tax preparer, wasn't me, but they went to a tax preparer, gave the taxpayer the W-2 and the tax preparer said, Hey, I see you made about $60,000 in income but you don't have any federal or state withholding.

And of course, you know, this employee is like, wow, how did that happen? So go back to the employer. Employer sends me an email and says, Ralph, Hey, such and such, you know, got her W2 form. She went to get her taxes done. And they're saying that she didn't have any federal or state withholding. And I said, okay, let me take a look.

Well, in this particular case, this person had said that they had four credits. So basically they didn't have any withholding because they didn't have enough taxable income to justify that withholding. Well, this employee is still mad. I've worked for 12 years in the same typical business. I've made the same amount of money, but now all of a sudden I work for this new employer and then her tax is taken out.

Well, the thing I went back to them and said is what were you looking at your pay stubs? You know, you get those pay stubs for a reason. They're not just for fun, you know, go look at that weekly or that bi week or that pay stub. Make sure things are right. If there's something weird on your pay stub, go to your employer, go to your HR person and address it.
Then you don't want to wait till the last minute for that. It's also a good time to look at your bank statements. Start compiling those receipts or any other documents that relate to your financial situation. That way, when you get to the end of the tax year and you're going to prepare that tax return, you're not scrambling around to find everything.

I mentioned on a show a week or two ago about, you know, maybe picking a day every week and just taking five minutes and say, you know, throughout the year, what am I going to need for my taxes? We'll do that once a month. A lot of my clients set up an envelope where they say, okay, you know, Ralph and they call it Ralph's envelope.

And when they come in, they have this manila folder and it's got all their stuff in it. You know, every time something comes and says tax is on it, Ralph. And the cool thing is a lot of places that mail out these things, they'll actually put it on the outside of the envelope because a lot of times it'll look like junk mail, but they'll put important.
I just got one this morning actually. They'll say important tax documents. Because here's the thing. Here's a truth bomb. You can avoid problems with the IRS if you have good record keeping because it not only makes tax preparation easier, but it also helps you avoid those audits. It helps you avoid those letters that you get.

Now you might be wondering, Ralph, okay, all that sounds great, but what do I do if I don't have my documents? So really you're asking, how can I obtain missing tax documents? Well, the first thing. That W-2, that's probably the most common form.

One of the things you can do if you're missing it, if you're missing a W2 or a 1099 is contact your employer or contact the person that paid you that as an independent contractor. They should be able to provide you with a copy of the missing form. Now, I've had situations where a person, you know, the place where they were working, they closed down.

Nobody followed up. That's one of the pet peeves I have. I really think business owners really should pay attention to this. Even if they shutter their business, even they closed their business, make sure you pay somebody to get those W-2 forms done. I don't know how many times I've had to deal with situations where those W-2 forms weren't available.
And the problem with that is, I'm going to talk about transcripts here from the IRS in a second. If the employer never filed the W-2, you're not going to be able to get it from the IRS either because they don't have it either. So you may have worked all year long and then the business closed, you may have paid taxes.

So but the first step, real simple thing, contact your employer and say, Hey, I didn't get my W-2. Now 9 times out of 10, they're going to say, well, we mailed it to you or Hey, here's the link. It's in your HR profile. So that's the first thing. Second thing, let's say you get behind on your taxes. You know, I don't know why, but it happens, right?
But one of the things you can do is you can request a transcript from the IRS. So if you don't have, you can't contact that employer anymore. Let's say you move to another state and you just don't know how to get in touch with them, or you don't know who those payers are. You can actually contact the IRS.

And this is a big reason for getting an IRS account. You go to irs.gov. I've covered that on other shows and you can get a transcript what they call wage and income transcript. And it'll actually show every single thing that was reported on your social security number. It'll show W-2s. It'll show 1099s, the interest statements, the dividends, the brokerage statements, the mortgage interest statements.

Now it’s basically the income side. The mortgage interest statement is one on the expense side but basically it's anything  that was reported under your social security number. I deal with clients who haven't filed for like two, three, four, I've had clients that haven't filed for 10 years. Well, that's a whole another discussion for another day. But the first thing, most of the time I'll say to them, Hey, let's get some IRS transcripts. Let's get an account record so we can see.

Cause a lot of times he'll even say to me, Ralph, I can't even remember the last time I filed. I think, how do you not know when you filed tax returns? But anyway, that's a good place to start. Now, you can also use the IRS form 4852. That's if you, in that situation, like let's say you work for a restaurant and that restaurant closed up and you can't find that owner to save your life.

That person is gone. Well, one of the things you can do is, and this is why I'm going to encourage you save your pay stubs. I don't care where you work, save those pay stubs, put them in a folder, put them in a scan box on your email or wherever you can put them and save them. Because if you don't have that W-2, if you can't get the W-2, you can actually use 4852.

That's a, that's an IRS form. It's what's called a substitute for W-2. And you can basically say to the IRS, look, here's my last pay stub. You can attach it to that form, and then you can still file your tax return and prove that information. Now it might not be processed right away because somebody's got to look at this.

The IRS is probably going to investigate and go try to figure out what happened with this employer, but that is a really smart thing to do. Now, one of the things that we ought to want to talk about here too, is let's say you're in that same position as John or Ernie. It sounds like you're in that same position.

If you file your return with estimated information, like you didn't know, like I sometimes I have a client and say, Ralph, I can't find this interstatement from my credit union, but I want to say it was like 30 bucks. One of the times, you know I thought to say, okay, let's just put 30 bucks on it. Do you think it was more than? No, it was probably less. Fine.
Let's put 30 bucks on this. Well, if you're able to find that information later, and it's a material difference, I think it's a big difference. You can actually file an amended return. And I would encourage you to do that. That's a 1040-X return. Now this is not an easy form to do. I really feel like you need to solicit somebody to help you with that, but you would file an amended return.

If that estimated information you later receive and you find out that it's wrong, or let's say for example, you're in John's case, you know, and John all of a sudden realized now it was too far. John was already too far into it. The IRS is auditing him. They're not gonna let you file an amended return.

But Ernie, let's say you now are thinking, I can't sleep at night. I'm worried that I didn't report this. Well, one of the things that I would encourage you to do is to preemptively reach out to somebody like me or a tax professional in your area and actually file an amended return. You might be saying, why would I do that, Ralph?

Well, because here's the deal. Now you've broken that criminal side. You've broken that willful intent. You say on the amendment return, oh, I just realized I didn't include this. And here's the information. In my personal opinion, I think that's going to do a couple of things. Now one thing is going to, it's going to set a line in the sand of like, okay, here's the tax return

that should have been filed. And yes, you're going to pay interest. You're going to pay some penalty. You're going to pay the tax. But I think it really mitigates some of those other concerns about getting audited, or if they're going to go digging deeper because 9 times out of 10 now, amended returns are processed by hand.

Somebody is going to look at them, but I think that would really solve your problem. Now, another thing you can do if you don't have that interest statement, you can reach out to your financial institutions. Many times a client will be sitting here in front of me getting their taxes done, and they'll pull out their phone and they'll say to me, oh, oh, let me look that up on the credit union.

Let me look that up at the bank. Oh, you know, let me call my broker while I'm here. 9 times out of 10, they can report, they can send you that information that you need to file your tax return. Now I'm going to end this section with something called The Cohan Rule. And this gets really in the weeds, but I think this is important to share because it's all about what we're talking today.

In some cases, if you don't have complete records, a tax professional may be able to apply what's called The Cohan Rule. And that allows for reasonable estimations of income and expenses based on credible evidence and specific circumstances. You might be saying, Ralph, you got to explain that to me.

Here's a great example of that. Let's say you own a restaurant. Picking on restaurants today. And there was a kitchen fire and that restaurant burnt to the ground. Terrible situation. But now you've got to file a tax return and all of your documents, your computer system, you didn't have, you didn't do good things.

You didn't back it up. You didn't take stuff offsite, but all of your records were destroyed in that. Well, at that point, the IRS could say, okay, let's do some estimations. Well, in that particular case, I'm going to get the bank statements. I'm going to see what was deposited. I'm going to see what checks, but you might say, Ralph, but yeah, we also do it a lot of cash work.

So that's where we can use that Cohan rule and we can estimate stuff. But again, that's a situation where there's some big deal happened. You've, you know, there was a natural disaster. Your house was in a hurricane, got hit by a tornado. There was a fire or something like that. Now let's talk about those penalties because that's sort of the elephant in the room is like, Ralph.

Okay. You talked about these penalties a couple of times. Let's get into some details.
So the IRS will charge tax penalties for inaccurate or incomplete returns. The first one they charge, and this is probably the most common one I see, and that's failure to file penalty.

This is if you don't file your tax return by the due date. Now you can easily avoid this by filing a tax extension, but the IRS imposes a 5 percent penalty of the unpaid tax, whatever that tax is for each month or part of a month that the return is late. Now you might say, okay, fine. I'm a late one late, but here's the problem.

Let's say you owe $10,000 and you don't file that return for six months. That's a 25 percent increase in the tax. You could have avoided that a hundred percent, that failure to file penalty by simply filing an extension or request for extension to file your return. Could have been completely avoided.

Another big one. This is probably the one I see secondarily the most common. That's the failure to pay penalty. A lot of people don't understand. Your tax is due when the tax return is due. So if you file, I mean, give you a simple example. So let's say you file an estimate, you file an extension, excuse me, April 15th comes around and you're like, Ralph, I don't have my stuff in order.

There's, I don't want to, I listened to what you said on your podcast show and I don't want to file an inaccurate return. So Ralph, let's just file an extension. And then I have to have a difficult situation with my clients and say, okay, that's fine, but here's what you need to understand. If you owe money.

So when we do your return in July, because you found extension, you get a six month extension or five months, whatever you want to pay. And you still owe money. Guess what? They're going to charge you a penalty back to April 15th. So if you kind of have an inkling of what you owe, pay it with the extension, because this can be a half a percent, or excuse me.

0.5 percent per month on that unpaid balance. Again, this can go up to 25 percent as well. So are you hearing what I'm saying? In those two penalties alone, they could increase your tax burden by 50%. But it doesn't stop there. Then we get to what John and I think Ernie, you might be experiencing too, if you don't get this problem resolved.

And that's the next thing they will charge is called the accuracy related penalty. So if you underreport your income, if you over, you take too much in credits or you over, you show your expenses, your deductions, the IRS can impose what they call an accuracy related penalty. That's 20 percent of the underpayment of tax.

And just think about that for a second. So Ralph, what did you just tell me? Yeah. I said the failure to file penalty, 25 percent max, the failure to pay penalty, 25 percent max, that's 50%. Oh, and now there's the accuracy related penalty. That's another 20%. Yes, you heard me right. So you're saying that I owe $10,000. Simple example, I owe $10,000.
And now they're going to add 70 percent to that. Correct. So now you don't owe $10,000. You owe $17,000 all because you didn't file on time. Maybe you didn't file that extension. You didn't pay on time. And then when you finally got around to doing your tax returns, they weren't correct. Yes. 70 percent tax.

And don't forget for I've talked about the next penalty, which is going to rock your world. They're adding interest on top of that as well. So let's talk about the next one. And that's the fraud penalty. If the IRS determines that this underpayment was intentional, was due to fraud, get ready to hear this one.

They could actually impose a penalty of 75 percent of the underpayment. So wait a second, Ralph. So I'm doing the math here. Did you just say 75%? Yes, I did. So let's start again. 20% failure to file, 25% you know, the failure to pay penalty. So now we're at 50%, 25 and 25. Then we got 20% for that accuracy related penalty.

Now we're at 70% and now they're going to add 75% on top of it. So you're saying, wait a minute, Ralph. So you're telling me now we're at 150% of the tax. Correct. Yeah. See, that's why this is so important. So you got to hear me. It is so important to do things the right way, because then let's just put the topping on the cake.

And then they're going to add that interest charge into that. And they're going to charge that interest on any amount of tax that you still owe. And that interest is based on market interest. It's not a small amount. You don't want to, you don't want to have the IRS as your banking institution. That's a bad plan.

So yes, that $10,000 that you owed could potentially grow to well over $25,000 with all the penalties and the interest. So you might be saying, Ralph, dude, now I am really scared. How do I fix all these things? Well, the good news is that's why I'm here. This is why I do this show. So I want to tell you about how you can resolve these problems.

First thing you can do is make sure you've got all your documents, you know, contact your employer, contact that payer, and make sure you've got those W2s. You've got those 1099s. You've got those interest things as we talked about, get that transcript from the IRS. If you've already missed the deadlines, get on IRS.gov or go to their local office, give them a call and get them to send that information to you. Then when you figure that out, let's say that you already filed a return, but it was wrong. Then file that amended return. I think that's a way to prevent those additional problems. And here's the thing, key takeaway from this section of the show.

This is not something you want to do on your own. This is not easy stuff. So this is where it's time to bring in a tax professional. I talked about that last week. You know, when we've reached that point of it's time to hire a tax pro, well, guess what? You're there now. If you're unsure about any of these processes, listen, pay some money, go at least have a consultation with a tax professional who can give you some guidance and make sure you're taking the right steps.

Now I know we covered a lot today, but one of the things I want to mention now is that every day when I record one of these shows, I also write a blog post where I go a little deeper. I put in some resources and some references, and you can always get to our blog post by going to askralphpodcast.com/blog.

So that's really a great thing to do. Every single show I've done, like maybe you've got some time to kill and you're like, Oh, let me go see if Ralph wrote about this, or let me go see if Ralph wrote about all of those for all of our episodes. I think we're well into a year and a half worth of those since I started, I relaunched the show back in November of 2023. But you can find all of those at askralphpodcast.com/blog.

Well, now let's get to our reflection questions and let's really dig into what we covered today. The first one is this. What steps can you take to ensure you have all your tax documents before filing? I think that is a really good place to start. One of the things that I recommend with clients, we use a product called Intuit Link.

And what Intuit Link does is it sends the clients an email. This is our returning clients. And it'll say, Hey, Mr. Roberts, last year you had this, this, and this here's. So that's a starting point, you know, pull out your tax return from last year. Look at the documents you had last year. It's not going to be a hundred percent, but at least it's a starting point.

It'll get you started and say, Oh yeah, I'm missing that or, Oh, I'm missing that. So that would be the first part. So start with what can steps can you take to ensure you got all your tax documents before filing? Second thing. What are some ways that you can improve your record keeping habits to make tax preparation easier?

Now I had a client say to me a couple of times, Ralph, come and use that like going to the dentist. I said, well, yeah. Okay. Let's use that analogy. Well, in the last time I went to the dentist, my dental hygienist said, Ralph, this ain't things look good. You're doing a great job. Well, guess why? Because I prepared, you know, I did that flossing every day.
I brushed my teeth twice a day. I use the Phillips Sonicare toothbrush or pick whatever you want. Well, taxes work the same way. If you prepare for them, then by the time you get to the tax preparer's office or if you sit down over the weekend and do them yourself, all your documents are ready. You're ready to just put them on to return and then, you know, be done with it.

And you know, you're confident in what you submitted. So that's the second thing. What are some record keeping habits you can improve? And third thing. This is why I do a Christian based show. What biblical principles guide your approach to financial integrity and honesty? Answer that question. You know, have you been tempted to file that false return?
Maybe it wasn't willful. Maybe it wasn't, no intention to defraud the government or defraud the IRS. It was just, man, I just don't feel like waiting Ralph for this form. It's a pain. You know, I worked for that person for a couple of weeks and I don't know if they're going to send me a W-2 or not. We started off the show talking about that financial integrity.
So what biblical principles should guide you in this?

Now let's get to the core matter of where we are now. And you might be saying, Ralph, I'm trying to piece together my taxes on my own. And this is the most overwhelming and stressful thing. And I hear you.

This is what I do for a living. It's what I do every day, but you don't, and maybe you've got that fear of you're missing important documents. You're scared of making mistakes and you don't want to end up like John and you face that IRS penalty or that IRS audit, because those things keep you up at night.

Well, I've got a solution for you. Cause that's where I come in. I offer detailed tax preparation services tailored to your specific needs because I know everybody's different. Not everybody's the same. So let me talk to you about my process. The first thing I do is what I call a thorough document review.

I'll review all your tax documents. I'm going to look at your tax return from last year, maybe two years back. And I want to ensure that nothing is missing. I want to talk to you about, you know, where did you work this year? Did you have bank accounts? Did you have brokerage accounts? Did you buy or sell a house?

Did you have marketplace insurance? All of those types of things, but bigger than that, I'm going to give you some record keeping guidance. I'm going to provide you with tips and strategies to help you improve your record keeping habits so that you don't feel like you're going to the dentist and you haven't flossed and you haven't brushed your teeth.
And it's a silly analogy, but it makes sense, right? Because I want to help you make tax preparation easier for you and for me. It helps me too. If you're in that position where we look at your returns and we find a problem, I'm going to offer you amended return assistance, because maybe you've already filed a return.

You realize you're missing documents. You're like, Ralph, I didn't even know about this. I listened to your show and man, I have no clue about this. I'm going to help you file those amended returns and correcting those errors. And if you get that letter from the IRS, talked about that in the show last week. What do you do when you get that letter? I'm going to help you with that IRS communication or that state taxing communication.
I'm going to assist you in communicating with them to help them or help you get that resolved in a timely manner and resolve all those issues. And so what do you get from that? Here's what I think the key benefits are. I said this last week when I talked about why you should select a professional.

Peace of mind. Most of my clients will say they know their taxes are handled accurately. They know they're handled professionally. It saves them a ton of time because letting a professional take care of the details so you can focus on other important aspects of your life is huge. Why do you want to lose a weekend doing your taxes when you can come in or we can do a Zoom meeting?

I meet with people all over the place in about an hour. I can resolve that issue for you. And the best part of this is that expert guidance. See, this is what I do for a living. You're going to benefit from my experience, my expertise, and ensure, and you'll be ensured that you have the best possible income.

So listen, here's my call to you right now. Don't let the stress of tax season overwhelm you. You can contact me by going to askralph.com. At the top of the page, you'll see, book a call with Ralph and together we can ensure that your taxes are filed accurately, and on time. I want to help you avoid that.

There's ridiculous penalties we talk about. I want to help you avoid those audits and interests. And I'm going to ask you to do one other thing. If you found this episode useful, if you found it helpful, and there's some things that I didn't even know about this, well, do me a favor. Share it with friends.
Everybody's got to file taxes for the most part. So take this episode and say, Hey, I just heard this episode on Ask Ralph. This guy really knows this stuff, but he did one today on, you know, what happens about refunds. And I mean, this is information you should know. And the final thing, if you feel compelled to, you can support the show by buying me a virtual cup of coffee.

Now you go to do that by askralphpodcast.com/support. Now I don't drink coffee. Nobody's going to deliver that coffee to me. It's what they call virtual coffee and you can make a support, a one time support. You can do a recurring support, but your generosity, and this is why I asked for this, your generosity helps me reach more people with a message.
And this message, if you've heard me today. I didn't talk about all the tables. Yeah. We mentioned the things that are problems, but I really want you to understand that there's hope and that hope comes from being grounded in that Christian faith. Well, that's it for today's episode. Remember, filing without all your tax documents is risky.

I think you've heard that. It's risky. It's penalties. There's interest. There's audits. There's all those criminal type things and it can lead to serious consequences, but with the right steps, and I've given you those today, reach out and talk to somebody, get some help. You can obtain the necessary paperwork and file an accurate return from the beginning.
Now, tomorrow we're going to be discussing what happens when you get an unexpected IRS refund. Like, Hey, there's a bonus here. What you should know, spark ways to handle it, and I'm also going to talk about some common scams that people have seen as it relates to refunds. So that's a show you don't want to miss.

And that'll be on tomorrow's show. And remember this, my passion is to help you achieve financial success. I want to see you live out your dreams and I want to see you grow in your faith. And I know together we can master your finances from that Christian perspective. So as I always end the show, stay financially savvy out there and may God bless you abundantly.

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