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Unfiled Tax Returns

What are unfiled tax returns and back taxes, and what are their consequences?

Most taxpayers are required by law to file their taxes on a yearly basis. However, it isn’t difficult to slip up. And if you do, the IRS can impose harsh penalties against unfiled taxes or withhold your refund.

If you don’t file a federal tax return yearly, there are a few things that can happen. The IRS may file a return for you (called a substitute for return or SFR), with taxes and additional penalties added on. They can even hold your refund without tax credit or deductions, if your return has been filed late enough. In other cases, you will be added to a watchlist and the IRS can pursue your return with additional consequences. The goal is to make delinquent taxpayers comply with filing and tax payment obligations. Outside of the IRS, lenders, brokers, and financial institutions will also be notified of your non-filing status and may bar you from getting a loan or financial aid.

If you have not submitted your income tax returns on time, you may also owe back taxes. These are taxes that have been partially or fully unpaid in the years(s) they were due, and can be owed federally or to your state. Back taxes accumulate interest and penalties regularly, usually every month until the taxes are paid in full. With increasing amounts of debts owed due to penalties and interest, the total tax debt can grow into a significant sum.

Unfiled tax returns and the unpaid taxes owed can quickly become a serious problem for people who cannot pay the taxes and fees. The government may press charges, demand immediate back tax payment, or sometimes impose jail time for the negligent taxpayer. However, payment plans can be arranged with the IRS to pay off back taxes, such as installment agreements, payment arrangements, or compromise settlements.

How many years does the IRS go back to collect on unfiled tax returns?

To avoid major additional penalties and potential criminal charges, the IRS requires taxpayers to file the past six years of delinquent income tax returns. However, there is a bit of a gray area when it comes to the IRS statute of limitations on outstanding returns. Sometimes IRS managers may require tax returns from further back than six years. This depends on:

  • The degree of flagrancy (if you have not filed returns for many years, or have a high outstanding past-due return balance)
  • A history of noncompliance (many instances of unfiled tax returns)
  • The impact on future voluntary compliance
  • The existence of income from illegal sources
  • Whether there is minimal or no tax due
  • IRS costs to secure the return, versus anticipated tax revenue

The IRS rarely goes past six years for non-filing enforcement, and in most cases delinquent returns are completed within three years after their late due date.

Why you should still file your back taxes

If you have unfiled income tax returns, file them immediately regardless of whether or not you can pay in full. Here’s why:

You may still be entitled to a tax refund.

If your returns are less than three years overdue, you are still entitled to the respective refunds.

You can protect your social security benefits.

If you do not file your taxes, your income won’t be reported to the Social Security Administration and you will not receive social security credits.

You can avoid issues when obtaining loans.

Loan approvals may be delayed if you are not up to date in regards to your tax filing.

You can avoid a substitute return.

The IRS may file a substitute return for you if you don’t file. This entails a return which won’t give you credit for deductions or exemptions you are entitled to.

How to Handle Unfiled Tax Returns

According to the IRS, an estimated 7.5 million American taxpayers do not file their required returns every year. If you are feeling overwhelmed by taxes or potential fees, there are steps you can take to handle your unfiled tax returns and get back in good graces with the IRS without facing excessive financial damage.

  • Determine your IRS delinquent return enforcement history and any necessary actions you need to take. If the IRS has made a delinquent return investigation against you, request time to file your overdue return or learn how to reverse prior IRS actions against you.
  • Determine which years you are required to file for. Review your previous income tax returns and see how many overdue returns are owed. In some instances, it may be less than you think.
  • Gather the documents and back records you need to file as part of your return(s).
  • Follow any special filing procedures determined by the IRS or your State Department of Revenue (if applicable) to file your accurate return(s)
  • Seek to lower penalties, limit financial damages, and get into a collection alternative if you owe taxes and cannot pay.

Our recommended tax experts at Community Tax can help you with these steps to begin preparing your unfiled income tax returns and to help alleviate the amounts you owe.

How to file unfiled tax returns

Below are outline the main steps you will need to take to file your unfiled tax returns.

  • Contact the IRS. To get back on track with filing your taxes, it’s important to contact the IRS as your first step. You should get information regarding what they are doing with your account, if they have begun a delinquent return investigation, if you have a caseworker assigned, and if the IRS has already filed a substitute for return on your behalf. When you are in contact with the IRS, you should also request your wage and income transcripts for the years you must file. The IRS will send your W-2 Forms and 1099s under your SSN for each year. You should also order your account transcript.
  • Request an extension. If the IRS has already made a tax assessment or filed a substitute for return if you had a balance due, request for extra time to file your returns to avoid enforcement actions. Typically, the IRS grants a “stay” or extensions up to 21 days to file the overdue returns.
  • Determine how many years you must file for. Most often people file too far back. According to the IRS Policy Statement 5-122, Delinquent Returns, taxpayers must file six years of back tax returns to remain in good standing, and that IRS management must approve anything more or less. However, the IRS is likely to override this policy if there are large potential tax liabilities or if a business is involved.
  • Gather documentation or information regarding income not on file with the IRS (such as investments or self-employment income). It is very important to prepare an accurate return that will match IRS records, so you should trace your income history and check your return against IRS transcripts to prevent the IRS from questioning the accuracy of your return. Make sure that you included all your income as it was reported to the IRS, and that you included all your withholding/estimated tax payments. In addition, get transcripts of any amounts paid towards estimated tax payments to credit any balances you owe.
  • Complete the return(s) and file them to the appropriate IRS unit, as sending to the wrong unit can delay your return processing for several months. Returns without enforcement should be sent to the normal filing location, while returns that substitute for return activity must be filed with the IRS SFR Unit for special processing. Make sure to attach a Penalty Relief Form, if applicable (if you have multiple unfiled returns, it will be much more difficult to manage the penalties and balances owed). Retain proof of submission in case the IRS takes actions against you in the meantime. It’s important to note the IRS will not pay any old refunds outside of three years of the due date of the return.
  • Get proof of filing. It’s important to get proof that you filed in the event that the IRS fails to process your return, or you experience related compliance activity such as IRS collection notices or an unfiled return investigation. Proof of filing will keep you covered against anything that may go wrong.
  • Address any penalties or balances owed. Failure to file penalties are 5% monthly with 25% maximum, failure to pay penalties are .5% monthly with 25% maximum, and fraudulent failure to file penalties triple the normal failure to pay penalty. However, you can request penalty abatement if you qualify (if it is a first time offense, or you have reasonable cause for late returns). If you cannot pay penalties or balances owed, there are several agreements such as a payment plan or collection alternative that can be made to prevent the IRS from attempting to collect all the debt owed.
  • Periodically request transcripts from the IRS to ensure that they are processing your return. If the IRS took prior action, such as submitting a substitute return, follow up to ensure that the case is closed with no matters outstanding.

Who can help me with unfiled tax returns

If this process seems overwhelming, your best bet may be to enlist professional help. With an A+ rating from the BBB and over $700 million in resolved tax debt, strongly recommends the tax experts at Community Tax to help guide you through this process. Community Tax professionals will help you gather all pertinent information needed to file a past-due tax return, mitigate any compliance issues, and be your communication with the IRS.

Get help from trusted tax professionals for your unfiled income tax returns, tax issues, or if you owe money to the IRS. Get a free consultation.

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