Lessons to Live By

I was contacted in early December by a woman who hadn't filed tax returns in the last 10 years, and both the Internal Revenue Service and the state of California wanted to know why.

Lesson 1: The IRS doesn't contact you if you haven't filed unless it believes you owe taxes. The agency isn't always right, but if you don't hear from it and don't file your tax returns, then apparently you don't mind the government keeping your money for itself.

Like most taxpayers, my new client believed the IRS was inevitably correct, especially as it was demanding returns for seven of those 10 years. Without deductions, they were simple returns—what the IRS refers to as 1040EZs. After I had prepared the first four years, I had to break some bad news to her. She didn't owe a penny. In fact, for those four years, she had been due refunds from the IRS and the state of California totaling more than $12,000. Unfortunately, there is a time limit for requesting refunds: three years past the date they were due (usually April 15). That meant she had lost that money simply because she hadn't filed her returns on time.

It is not at all uncommon for taxpayers who haven't filed for several years to be scared when they first come in our door. The first thing I let them know is that our house record for unfiled returns by a client is 13 years. Most of them relax right away. But what's sad is that three-quarters of the time, the clients lost refunds by filing late.

Lesson 2: File on time.

When I asked the woman why she had let those years go by without filing, she said she had been lazy. In a couple of those years, she had purchased tax preparation software for her computer, but when it looked like she was going to receive only a little bit of money, she hadn't bothered to finish preparing her state return. She didn't think it was worth the trouble.

Unfortunately, she hadn't properly answered the questions asked by the software, which didn't know she had a son and could therefore file as a head of household, giving herself a second exemption and a child tax credit.

Lesson 3: Think carefully before you decide to prepare your own tax return. Although computer software may guarantee that the calculations are accurate, it doesn't allow for operator error.

I asked the woman why she decided to do it herself. She said she was proficient with computers (that's her profession) and was concerned about the cost of having her returns done professionally. Because they were EZ returns, I told her, my office wouldn't have charged her more than $85 per year. Heck, the cost of the software plus the state filing fee plus the electronic filing fee total almost that much. She ended up losing more than $12,000 trying to save herself $340.

Lesson 4: Don't be penny wise and pound foolish.

Now that she knew she would probably come out ahead on the remaining three years (2008, 2009, and 2010), we finished those returns as well. The story ended happily for her, with total refunds of more than $13,000 that she was still eligible to receive. It may take a couple of months for processing, but eventually she'll get the checks.

It was still difficult for her to admit, however, that she had lost $12,000 because she was lazy and later because she was afraid of what she might owe.

So my final lesson is: Always file your tax returns. Then you never have to be afraid of scary ghosts under the bed.