The tax mistake that can snowball into years of trouble

Some Australians have fallen so far behind on their tax returns that they've built up a backlog stretching 20 years.

Yet many people who finally catch up discover they're actually owed money and have been missing out on tax refunds worth hundreds or even thousands of dollars.

Tax experts say fear of tax debts, penalties and ATO scrutiny often causes one missed tax return to snowball into years of unlodged returns.

Here's what happens if you haven't lodged a tax return, and how to get back on track.

Why do people avoid lodging tax returns?

Missing a tax return doesn't mean the problem will go away.

But in many cases, taxpayers who have fallen behind can get back on track, avoid harsher consequences and even uncover refunds they didn't realise they were owed.

"People miss a tax return for various reasons, including money troubles, personal difficulties and ill health," says Mark Chapman, director of tax communications at H&R Block.

"It isn't unknown for a client to come into our offices with a 20-year backlog of outstanding tax returns," he says.

"Often they become scared to interact with the system because they can't afford to pay the unpaid tax or the potential penalties for late lodgement, which leads to them missing the next year's return and the next year's and so on."

While there are plenty of downsides that come with not filing one or more tax returns, the good news is that it's never too late to make amends.

Before tackling overdue returns, it's important to understand who is actually required to lodge one in the first place.

Who needs to file a tax return in Australia?

Most Australians need to lodge a tax return because they earned taxable income during the financial year.

However, you may also need to lodge if tax was withheld from your pay or other income, or if you want to claim deductions and access any refund you're entitled to.

Foreign residents may also need to file a return if they earn income in Australia (with a few exceptions), or if they received a study or training support loan during the year.

While it may be a chore or even a source of anxiety, submitting a tax return is important for a number of reasons. Avoiding penalties is one of them (more on that below), but as Chapman notes, a lot of the time people may be actually missing out on a refund owed to them.

"Many of the people who don't lodge don't actually realise that they don't owe any tax - they are actually due for a refund," he says.

"This means that as well as missing out on the refund, which is actually their money, not the ATO's, they aren't liable for a late lodgement fine because the ATO only penalises late lodgers where there is tax owing."

What are the penalties for lodging a late tax return?

It's entirely possible that someone might be able to avoid the tax office for a few years, but if the ATO is owed money, it's likely that they'll eventually come calling.

"The ATO have now taken a firmer approach with taxpayers who don't engage with them and have outstanding obligations," says Gavan Ord, spokesperson for CPA Australia.

"Getting your tax return right is your responsibility. This means declaring all your income and claiming the appropriate expenses. Failure to properly declare your income increases your chances of being audited by the ATO."

So what could non-lodgers be looking at in the way of fines?

The penalty approach from the ATO is based on a sliding scale which also differs depending on the size of the entity in question.

"There are penalties for non-lodgement of a tax return which means that you are likely to be penalised by $330 for each 28 days that the return is late, up to a maximum of $1650," explains Chapman.

"If that doesn't get you to lodge, the ATO can issue you with a default assessment - which is an estimate of what the ATO thinks you owe, based on their third party data - which is likely to be excessive because it won't include any deductions you are entitled to."

Failing that, the ATO may go down the prosecution route as a last resort.

Can you lodge a tax return years late?

The good news for taxpayers is that outstanding tax returns can generally still be lodged years after the original deadline.

In some cases, people discover they are entitled to refunds. Others may find they owe tax, but can work with the ATO on a payment arrangement.

However, delays can increase the risk of penalties, interest charges and compliance action, so it's generally better to act sooner rather than later.

Tax agents can often help reconstruct records and identify information already held by the ATO, which can make it easier to bring multiple outstanding returns up to date.

What should you do if you've missed several tax returns?

Whether it's a matter of a couple of weeks or a couple of years, Chapman suggests that it's always better to be proactive about rectifying an overdue lodgement rather than sticking your head in the sand.

"Telling the ATO of any difficulties you are in and explaining the situation almost always produces a better outcome, in terms of penalties, than ignoring the issue and hoping that it goes away - it doesn't, it simply means greater consequences down the track."

When should you speak to a tax agent?

Both Chapman and Ord also recommend that those looking for additional help about their options and obligations consider seeking advice from a tax agent.

"If you have lodgements outstanding from previous years, your tax agent will be able to bring you up to date. The sooner you get in touch, the better," Ord says.

"The more complex an individual's earning activities and finances, the more they should consider expert advice.

"For instance, if you're receiving rental income, hold shares in multiple companies, or have bought and sold cryptocurrency, you should consider speaking to a tax agent."

People experiencing financial difficulty who owe money to the ATO may also be eligible for a payment plan in order to break down the balance owed into smaller instalments.

The bottom line

The key message from tax professionals is simple: don't let one missed tax return turn into several.

Whether you're one year behind or 20, taking action now can help minimise penalties, reduce stress and could even uncover a refund you didn't know you were owed.

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