With each passing year, the IRS gets more and more efficient at catching non-filers. If you have gotten away with not filing a tax return in the past, don’t expect to in the future. Even if you missed the past few years, it is in your best interest to file those returns because the IRS will likely catch up with you sooner or later. If you don’t file a return can take up to 3 years for the IRS to finally contact you, by this time it is likely that you have racked up a huge about of interest and tax penalties on top of what is owed, or you will ruin your chances of getting a refund that was once due to you.
The IRS uses a system called The Information Returns Processing (IRP) System. The IRP system collections information from third parties and stores all that information in one massive master file where it will later match up that information with individual taxpayer information that is provided. If you had any income from anyone else it is very likely that it will be reported to the IRS and this is the information the IRS will sooner or later use to track you down for unreported items or unfiled taxes. Most companies that pay you any type of income such as salary, pension, interest, dividends, etc, will require you to provide them with your SSN and tax information before they pay you anything, which is because the IRS requires them to report this information annually. Below are some common third parties that report your information to the IRS.
- Your employer: If you have a job, your income will be reported by your employer.
- Brokerage: If you own stocks, bonds, money market funds,etc, all proceeds will be reported.
- Social Security Administration: If you receive social security benefits this information is sent to be stored in the IRS master file.
- Casino: If you won a large amount of money a casino will likely require you to fill out your information before they pay you out and will later send that info to the IRS.
- Unemployment: If you received unemployment, this income will be sent to the IRS to be checked off the master list.
- Business you are a partner of: Are you part of a business? Your K1 information will be reported to the IRS when the business files their annual tax return.
- Pension Funds: All pension income is reported annual to the IRS.
- IRA: When you withdrawal from your individual retirement account these amounts are taxable and reported to the IRS.
The above list can go on and on depending upon your situation. It is very likely that you will have at least one company or person that is required to report payments to you over the year and this is the information the IRS will use to eventually find you if you did not file your taxes. It does take time for the IRS to analyze all this data and match off everything, but each year that passes their technology gets better and faster and they have been catching a greater amount of people at an increasing rate.
If you have unfiled taxes it is a good idea to get started right away with getting back on track. Penalties and interest add up very quickly on unfiled returns if you owe money. If you don’t owe money, you only have 3 years to claim a tax refund. So if you ever wondered if the IRS will find out you didn’t file, the answer is yes, it may take time but you can be assured they will be contacting you.
Obama has increased funding in the past year by 5% to 12 billion so that they have more staff to go after taxpayers and companies that have not paid their taxes. The chances for individuals to get away with things is getting smaller each year. It is important to not try to game the system so you can avoid an unecessary tax penalties.