Five Selfish Reasons To File Taxes
Most Americans don’t need many reasons to file their taxes. Several laws require that you file your taxes every year and people file in order to avoid any trouble with the IRS and/or state. Many reluctantly acknowledge that taxes are necessary to fund government policies that keep our country afloat. But what about the people who don’t believe government spending helps their country and think they can get away without filing? Do they have any reason to file their taxes? It turns out I can think of at least five reasons why people with this mindset should still file their taxes.
1) Getting Loans
Back when my job was focused mostly on tax resolution there were usually two reasons why non-filers decided to become compliant. One was that they were caught in some way, usually notified through an IRS notice. The other reason was that they wanted to get a mortgage. Every reputable bank/credit union is going to request prior year tax returns before approving a mortgage.
Meanwhile self-employed non-filers will find it difficult to get loans to expand their business. They may even experience difficulties being approved for an auto loan! Limiting oneself to paying for everything using cash isn’t the best strategy for building wealth or growing your business.
2) Investment Opportunities
One of the best ways to grow your wealth is through investing in equities through a brokerage account. Technology has made it easier than ever to open a brokerage account, most major brokers don’t have fees when purchasing basic equities and they usually require very little up-front investment in order to open an account.
Typically brokers won’t ask for prior year tax returns to open an account, however they are required to obtain your social security number and will report any income made to the IRS. Once the IRS sees you have a good amount of investment income and that you aren’t filing your taxes you’re pretty much guaranteed to get a notice.
3) Avoiding Marriage Issues
One of the leading causes for divorce are financial problems. It’s safe to say that not filing your taxes would be a major financial problem. The spouse could try filing separately, but they’ll likely face the same barriers as stated throughout this article. The IRS also has authority to go after the spouse for back taxes even when filing separately.
Spouses do have some form of protection in the form of Innocent Spouse relief. This type of relief separates the tax liability between the couples if they qualify. Mind you, this is a very obtrusive process and time consuming process that is commonly denied so you don’t want to have to rely on this.
4) Social Security and Other Government Benefits
Paying your taxes isn’t completely an expense. Income subject to payroll taxes (specifically the social security portion of FICA) will count towards the wage base for social security benefits. Skip filing and you’ll miss out on decades of credit earnings during a time when you may not be able to work anymore.
It’s not just retirement. All states require employers (sometimes the employees too) to contribute towards unemployment insurance. If the employee is laid off then they’ll likely be eligible for unemployment benefits. Most states have rules for self-employed individuals to receive benefits, but typically there are stricter conditions to qualify.
5) Avoiding Unnecessary Stress
Finally, there’s a unique kind of stress that comes with knowing you’re breaking the law and hoping no one notices. Some non-filers live with that low-level anxiety for years — a nagging worry that one day, the IRS will catch up.
And they usually do. Whether it’s a bank reporting interest income, a brokerage reporting capital gains or a potential employer running a background check, sooner or later, the trail leads back to your unfiled returns. Filing on time means sleeping better at night and focusing your energy on more productive things.
As you can see, there are a number of benefits to filing and paying your taxes that non-filers are either limited to or are unable to experience. Admittedly, I doubt these alone exceed the costs associated with filing and paying your taxes. They should be seen more as added benefits of following the law and fulfilling your civic duty. Personally I think the government should creating more ways to incentivize tax compliance as opposed to threatening penalties.