Tax Tip: Do I Have to File a Tax Return?
Many taxpayers know that if they do not make a certain amount of income they do not have to file a tax return. However, many people believe this income amount is on a “net” basis rather than a “gross” basis. When reviewing the IRS tables for who must file based on income amounts, you have to consider all income earned irrespective of any deductions. For instance, if you buy a house in 2013 for $300,000 and have to later sell the house during 2013 for $250,000, even though you have lost money you still may have a filing requirement because your gross income was $250,000.
Failure to understand this rule can result in a few problems. First of all, if you fail to file a tax return there is no statute of limitations for the IRS to review your tax year and make an assessment. Meaning, in 20 years the IRS could come back to you and ask why you didn’t report the $250,000 of income from your house sale. At that point, it may be difficult to find accurate records to show you actually had a loss, especially if it relates to other items smaller than the sale of a house. Also, the income earned on the sale of the house is reported to the IRS, but not how much you paid for it originally. Therefore, if the IRS files a tax return on your behalf, known as a “substitute for return” or “SFR”, it will only have the full income amount. Once this IRS prepared return is processed they can begin collection actions on the debt such as liens, levies, and wage garnishments.
Make sure you review your situation carefully when determining if you must file a tax return. Contact us at Hone Maxwell LLP today if you have any questions regarding your filing situation, or if you have already run into this unfortunate set of circumstances and need help in dealing with the issue. As always, follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.