Independent contractors and self-employed members of the workforce must consistently file their tax returns to avoid the following inconveniences and repercussions.
RELATED: How To File Back Taxes
In this article:
- Accumulation of Penalties and Interests
- Withheld Tax Refund
- Losing Tax Deductions
- Compromised Social Security Benefits
- Delayed Loan Approvals or Rejected Loan Applications
- Taxing IRS Collection and Enforcement Process
Why Self-Employed and Independent Contractors Must File Back Tax Returns
1. Accumulation of Penalties and Interests
Filing and paying taxes is a legal responsibility expected of all. Everyone must abide by this rule if only to avoid unfavorable consequences.
Failure to file and pay taxes can lead to accumulation of exorbitant amounts of penalties and interest. In the end, this scenario proves more financially burdensome than actually paying the IRS what it is owed in a timely manner.
Failure to cater to tax responsibilities can lead to monthly penalties amounting to between 5% and 25% of the total back taxes owed. If a taxpayer is found to have attempted to defraud the IRS intentionally, the interest rate range per month can reach as high as between 15% and 75% of the total back taxes owed.
Suppose a taxpayer owes the IRS $10,000. They will have to pay at least $500 in interest every month until the entire back tax has been paid. These penalties and interest can and will add up fast, potentially risking a taxpayer’s financial situation further.
This is one major reason why taxpayers must religiously deliver their tax returns, and, consequently, their back taxes. After all, paying penalties and interest is never a viable financial alternative.
For those already in a dire financial situation, there are tax relief options one can apply for. For instance, the IRS allows full payment extension for 60 to 120 days past the deadline in certain cases.
To file for a payment extension, taxpayers can either call 800-829-10140 or apply online. Meanwhile, other tax relief options worth looking into include Offer in Compromise and Installment Agreement.
2. Withheld Tax Refund
Failure to file tax returns can lead to the IRS withholding tax refunds. This rule applies to both refunds for estimated and withholding taxes.
The IRS will not release a taxpayer’s rightful tax refund unless a past return, and its consequent tax dues, has been settled. In some instances, the agency allows leeway to taxpayers who can provide an acceptable reason for not accomplishing tax returns within their specified deadlines.
This is another argument why a taxpayer must file their tax returns consistently. After all, tax refunds withheld by the IRS, whether temporarily or permanently, amount to a financial loss.
3. Losing Tax Deductions
Not filing tax returns does not mean a taxpayer can get away with not settling their tax debt. Tax law allows the IRS to file a Substitute for Return (SFR).
SFR is carried out if a taxpayer fails to respond to a Notice of Deficiency CP3219N from the IRS. This letter equates to a tax assessment proposal, which ought to be addressed within 90 days upon receipt.
Once the IRS files a Substitute for Return, a taxpayer essentially loses all control of their records. SFR is favorable only to the IRS.
A filed SFR will not take into account any tax exemptions or deductions a taxpayer might be eligible for. For example, independent contractors, who normally qualify for deductions related to operating their business or private practice, might not see these tax privileges included in their return.
However, keep in mind that taxpayers can still file their returns even if the IRS has already filed an SFR on their behalf. Furthermore, in cases of incorrect records found in the IRS’s SFR, taxpayers can question and appeal erroneous data by contacting 1-866-681-4271.
Substitute for Return (SFR) Definition: Tax return filed by the IRS on behalf of delinquent taxpayers who neglect to file their own returns.
4. Compromised Social Security Benefits
Another major downside to neglecting to file tax returns and paying back taxes is risking social security benefits. This drastically affects a taxpayer’s financial safety net.
Without a taxpayer’s returns, the IRS will not report self-employment income to the Social Security Administration. Information pertaining to a taxpayer’s self-employment income is needed by the Social Security Administration to assign points and credits to its beneficiaries.
Losing Social Security credits means risking disability and retirement benefits. Obviously, this is not a risk worth taking.
5. Delayed Loan Approvals or Rejected Loan Applications
Taxpayers who are planning to refinance their mortgage, apply for a business loan, or carry out any kind of transaction with a financial institution, might find it difficult to have their applications approved. The luckier ones may suffer no more than delayed approvals.
Either way, it is best to avoid these scenarios. Filing tax returns on schedule eliminates these potential problems.
Remember that all financial institutions require a copy of tax returns to assess whether they should pursue a financial partnership with an applicant. Failure to provide these documents is a legitimate red flag.
6. Taxing IRS Collection and Enforcement Process
The IRS has steadfast systems in place to pursue tax collection. Aside from the penalties and interest discussed above, the agency also carries out other more drastic means to enforce its mandate.
For instance, the agency can enforce a levy on a taxpayer’s personal assets. This includes both liquid and non-liquid assets.
As for liquid assets, the IRS can directly seize the funds in a taxpayer’s savings account. Meanwhile, in terms of non-liquid assets, houses, cars, and even valuable furniture prove of interest to the IRS.
Seized assets will offset any back taxes owed by a taxpayer. Once collected by the IRS, these assets cannot be retrieved.
The benefits of consistently filing tax returns in a timely manner for independent contractors or self-employed individuals outweigh the inconveniences present in the process. After all, there is no getting around this legal responsibility.
Please don’t hesitate to share helpful tips for our readers in the comments section below if you are an independent contractor with ample experience on the subject discussed above.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.
- 11 Tips On Filing Back Taxes
- Estimated Taxes | How To Determine How Much You Should Save
- Can You Go To Prison For Not Paying Taxes?