Do you have unfiled tax returns? Do you owe back taxes to the IRS? Are you worried that the IRS is going to find you? Are you feeling scared about what could happen and looking for help?
If you have answered yes to any of these questions, you are not alone, but you need to take the situation very seriously. Here’s what you need to know to protect yourself from the IRS and a look at the steps you should take when you have unfiled tax returns.
IRS Identification Of Non-Filers
Every year, the IRS gets more sophisticated and improves its methods of identifying delinquent tax filers. The agency uses powerful software to compare the information it receives from some tax filers to assess what information it may be missing from other filers. For instance, when your employer claims a deduction for your wages or sends a copy of your W-2 form to the IRS, the IRS also expects to see a tax return from you reporting that income, and if the IRS doesn’t see your return, the agency will contact you.
Regardless of the cause of your late tax filing problem, you need to take this problem very seriously. The IRS is becoming very skilled at finding non-filers and back tax returns. Even if they have not found you yet, the agency will find you, and you may face very serious consequences if you continue to ignore the situation. There is an urgency to filing delinquent returns, and you need to take matters in your own hands before the IRS and/or state tax authorities choose to do so.
Back Tax Returns: Statute Of Limitations
Normally, there is a 10-year statute of limitations on tax debt, and the clock starts ticking the day you file your return or when the IRS assesses your tax debt. This 10-year period can be suspended in a handful of situations such as when you’re in the midst of filing bankruptcy or if you agree to a suspension in exchange for a certain payment plan. However, in most cases, the IRS only has 10 years to collect your tax debt. Once that time limit expires, the statute of limitations is over, and the IRS can’t pursue you anyway.
Unfortunately, however, if you have unfiled tax returns, the clock hasn’t started on your statute of limitations. That means that the IRS can seek your unfiled returns six years from now, 15 years later, 30 years later and so forth. In other words, there is no statute of limitations to go after your unfiled returns. The statute of limitations clock doesn’t start until you file your return.
In some cases, the IRS may send you a notice requesting that you file a delinquent tax return right away. In other cases, the agency may take several years to inform you that it hasn’t yet received your tax return yet. But in all cases, the IRS will eventually notice that you haven’t filed a tax return, and it will pursue you for any associated late taxes. The IRS does not forget. The IRS does not go away.
Substitute for Return (SFR)
Just because the IRS has not contacted you does not mean the agency has missed your failure to file. Eventually, the IRS will prepare your return based on what is in the best interest of the government, usually with little or none of the deductions you are entitled to. The IRS prepares a “Substitute for Return” (SFR) for your late tax returns in the best interest of the government, resulting in the IRS overstating what taxes you owe and, consequently, what you owe in penalties and interest.
Usually, the only deductions you’ll see on an SFR are standard deductions and one personal exemption. You will not get credit for deductions which you may be entitled to such as exemptions for spouses, children, mortgage interest and real estate taxes on your home, the cost basis of any stock sales, and business expenses for your self-employment income reported on a 1099-MISC, etc.
When the IRS issues an SFR, it sends a copy to your state. If you live in a state that assesses income tax, your state tax revenue department will also generate a substitute return, and you may end up owing both state and federal income tax.
What to Do If You Receive a Substitute for Return
If you receive an SFR, you need to contact the IRS. As explained above, these returns usually do not adequately represent your financial situation. To give you an example, imagine you sold your home for $200,000 during the tax year associated with the SFR. As of 2019, when you sell your primary residence, you receive a capital gains exemption for $250,000 if you’re single and up to $500,000 if you are married filing jointly. These numbers may vary for other tax years.
However, when preparing the SFR, the IRS doesn’t take the exemption into account, Instead, the agency notes the entire $200,000 for the sale and charges you capital gains tax on that whole amount, leaving you with an unwieldy tax bill. Depending on your situation, you may have all kinds of other taxes and assessments on your SFR that don’t really apply to your situation.
To free yourself from that debt, you should contact a tax professional and have them adjust the SFR so that it reflects what you truly owe. A tax professional can ensure you get all the deductions, credits, and exemptions you deserve. Remember, once the IRS issues an SFR, the agency usually starts collection activities as soon as possible, and the IRS has a lot of power to get the money it believes you owe. The sooner you take action, the better.
Consequences of Not Filing Tax Returns
If you haven’t received an SFR or other correspondence from the IRS, you may be tempted to ignore your unfiled returns. You may hope to fly under the radar and escape the IRS’s notice. This is a risky choice. Failing to address your tax problem can result in serious consequences including the following:
- Potential criminal charges
- Difficulty obtaining a job
- Civil penalties such as fines and fees
- Wage and Social Security garnishment
- A “Substitute for Return” filed by the IRS
- Tax collection enforcement
- Tax liens
- Bank account levies
- You and your dependents will be ineligible for student loans
- Difficulty obtaining credit to refinance a home or obtain new credit
As you can see, the IRS can financially paralyze you. To avoid these consequences, it is important that you address the situation immediately.
Make no mistake, this is not a situation to take lightly, failing to file your tax returns can be a criminal offense. The further passage of time only contributes to the amount of back tax help that will be needed to fix your tax problems. The IRS will not entertain any type of tax settlement (such as an Offer in Compromise) or installment payment plan to settle your back taxes until you have filed all legally required tax returns.
Refunds and Late Tax Returns
What if you haven’t filed a tax return and you deserve a refund? Here’s the good news — you can file your tax returns and claim refunds. Even better, when the IRS owes you money, you don’t have to worry about penalties, fees, or interest on those unfiled returns. However, you have to file late tax returns within three years to claim a refund. That’s why it’s critical to get help as quickly as possible.
If you owe money to the IRS for some years but deserve refunds for other years, the refunds can help to offset your tax debt. For instance, if you owe $20,000 from a tax debt and fees from an unfiled return from four years ago, but you would have earned a $5,000 refund from each of the last three years, a tax professional can help you take care of all those old delinquent tax returns.
Once you apply the $15,000 in refunds to the $20,000 tax debt, you end up only owing $5,000. Keep in mind, the IRS isn’t going to chase you down to give you a refund. In a situation like this, the agency is probably only going to contact you about the year where you owe money, and it’s likely to not even mention the other years and the potential refunds.
The Failure to File Penalty
Not filing your tax returns is worse than not paying your tax debt. When you don’t file a return and you owe money, the IRS starts to assess the failure to file penalty on the very first day that your return is late, and the penalty is 5% of your tax owed. This penalty is assessed every month and can get up to 25% of your total tax debt.
Here’s an example. Let’s say you owe $10,000, but you don’t file a tax return. The first month, your 5% penalty is $500. This penalty continues to accrue monthly for five months until it reaches 25% of your balance which is $2,500 on a $10,000 tax bill. The amount varies based on how much you owe — for instance, if you owe $100,000 in income tax, the penalty can get up to $25,000. After that point, interest and failure to pay penalties may continue to accrue on your account.
In contrast, if you file a tax return, but you don’t pay, you incur the failure to pay penalty. This penalty is 0.5% monthly so on a $10,000 tax bill, the penalty is only $50. If the IRS issues a notice that it intends to levy (take) your assets, the failure to pay penalty increases to 1%, but even then, that is only $100 a month on a $10,000 tax bill, still substantially less than the failure to file penalty. Once you set up a payment plan with the IRS, this penalty falls even lower.
The failure to pay penalty can also get up to 25% of your total balance, but that can take years. As explained above, the failure to file penalty can tack 25% onto your bill within a short five month period.
Penalty Abatement for Unfiled Tax Returns
Penalty abatement is when the IRS reduces or eliminates some of the penalties that have accrued on your account. If you qualify, you can get relief from failure to file penalties or other fees through the First Time Penalty Abatement program.
To qualify for abatement, you must meet the following three criteria:
- You have no penalties for the three years prior to the tax year where you didn’t file, or you weren’t required to file during those three years. This means you usually cannot get abatement through this program for multiple years of unfiled tax returns.
- You have filed all returns that are due up to date or you have requested filing extensions on those returns.
- You have entered into a payment plan or made other arrangements with the IRS on the tax debt you owe.
If you don’t qualify for the first time penalty abatement program, you may qualify for a penalty reduction or abatement through another channel. For instance, the innocent spouse program provides relief to spouses who weren’t aware that their partners were racking up tax debt or refusing to file.
Criminal Tax Evasion
In a worst case scenario, you can face misdemeanor charges for not filing a tax return. Luckily, the IRS does not usually pursue criminal charges in these situations. Instead, the agency sticks with the fines and civil penalties discussed above.
However, the agency has up to six years to reach out and assess criminal charges for not filing. The charges can include up to one year in jail and $25,000 in fines for every year that you didn’t file. Even worse, if the IRS believes that you are willfully trying to evade taxes, the agency can charge you with tax evasion.
Tax evasion includes hiding or misrepresenting financial details to avoid paying tax. If someone is found guilty of tax evasion, they can face up to five years imprisonment and up to $100,000 in fines. This is a felony charge. Usually, only a small handful (about 2,000 or 3,000) people face criminal charges for tax issues every year so you shouldn’t worry too much about this issue. But to be on the safe side, you should take care of your taxes before the IRS starts to get suspicious.
What You Need to File Delinquent Tax Returns
To file your federal tax returns, you need to gather as much financial details as you can about the years where you didn’t file. Ideally, you need information about your income, including W-2 forms from your employers, 1099 forms from companies that paid you as an independent contractor, receipts related to revenue collected by your business, and any other documents related to money you earned during the tax year.
You should also see if you can find financial documents related to potential tax deductions or credits. For instance, if you paid mortgage interest, you should get a statement from your bank. If you paid for childcare, you should look for receipts from your child’s daycare provider. If you have business expenses, you should look for receipts or invoices related to those expenses. A tax professional can let you know more about which documents can help to support the deductions and credits that are relevant in your situation.
Note that you also have to use the tax return from the year in question when you file a late tax return. You can’t do file back tax returns with the current year’s tax form because laws, deductions, credits, and other details change nearly every year.
Depending on how much time has passed, you may not have any of the above information and you may be wondering how you can obtain those details. Luckily, there are options.
How to Obtain Missing Documents
If your delinquent tax return is from the last seven years, you may be able to get some of your missing documents from the person or business who issued the document in the first place. The IRS requires taxpayers to keep paperwork for at least seven years. As a result, your old boss may have a copy of your prior year’s W-2 forms, or your bank may have copies of 1099 forms for investment income you earned in the past. You may want to reach out to these entities to see if they can help you. When you work with a tax professional, they can handle a lot of these contacts on your behalf.
In some cases, you may be able to obtain some documentation directly from the IRS using Form 4506-T (Request for Transcript of Tax Return). This form allows you to request transcripts of old tax returns and information about payments you’ve made to the IRS. On top of that, you can also use this form to request W-2s, 1099s, 1098s, and 5498s.
Typically, W-2s contain information about employment income you’ve received. The 1099 series forms have details about investment and freelance income, while 1098s are for mortgage interest. 5498 reports contributions to IRA. Form 1099-R reports retirement distributions. The IRS prefers that you contact the original payer for these documents, but if that doesn’t work, you can request information with this form. Again, you may want to have a tax professional help you.
Payment Options for Taxes Owed on Unfiled Tax Returns
People don’t file tax returns for a number of different reasons. In a lot of cases, you may have avoided filing because you didn’t have enough money to cover the tax you owed to the IRS. The IRS can be incredibly harsh when you ignore your tax obligations, but if you reach out, the agency is surprisingly willing to work with people. Depending on your situation, you may be able to use a variety of different options to deal with the tax debt associated with your unfiled returns.
Here are just some of the options potentially available to you:
- Payment plans — The IRS offers installment payment plans where you can make monthly payments for up to 84 months. To qualify for a payment plan, you must have filed all back tax returns, and you may need to set up direct debit from a bank account to secure your plan. As you make payments, interest continues to accrue on your account, but collection activity (liens, garnishments, etc) and penalties stop.
- Partial payment plans — With a partial payment plan, you also make monthly installment payments on your tax debt, but the payments are structured so that you don’t have to pay all of your tax bill. The IRS agrees to write off some of the debt in exchange for your cooperation.
- Offer in compromise — An offer in compromise (OIC) is where the IRS settles your tax debt for less than you owe. Basically, you make an offer, and the IRS agrees to compromise. Usually with a settlement, you make a lump sum payment, but in some cases, you can divide the settlement into a few payments over a slightly longer time period. To qualify for this option, you have to make a full financial disclosure to the IRS. You should work with a professional so they can negotiate the lowest settlement possible for you.
- Hardship agreement — If you truly cannot afford to pay your tax debt, the IRS may give you a hardship agreement. Also referred to as currently not collectible (CNC) status, this option gives you a break from IRS collection activities while also providing relief from your debt. Again, you have to provide detailed financial information to the agency to prove that you cannot make your payments. This is not a permanent status. The IRS reviews your file every year to see if changes to your situation make you able to pay. However, once the statute of limitations expires, you no longer owe the tax debt.
Bankruptcy and Unfiled Tax Returns
If you file bankruptcy, you may be able to get some tax debts discharged. With Chapter Seven bankruptcy, qualifying tax debts can be completely erased, and you don’t owe them anymore. Under Chapter 13 bankruptcy, you may get the option to make payments on some of your old tax debt, and then, a portion of the tax debt may be discharged at the end of the payment period.
To qualify for a discharge or to be included in a bankruptcy payment plan, the tax owed must be income tax. Usually, you can’t write off payroll tax or corporate tax in a personal bankruptcy case. The tax debt must also be at least three years old, and you must have filed the return at least two years ago. You can’t discharge tax debt related to an unfiled return, and you also can’t get rid of tax debt from a substitute return in a bankruptcy case.
On top of that, you also can’t discharge tax debt if you have unfiled tax returns from the last four years. If you’re thinking about filing for bankruptcy and you have unfiled tax returns, you should talk with a tax debt specialist. They can help you file late returns so that you get the most relief possible from your bankruptcy case.
Reasons to File Delinquent Tax Returns
Filing back tax returns offers you a lot of benefits. Depending on your situation, you can enjoy many of the following advantages when you file a back tax return:
- Reduce or avoid interest and penalties for not filing
- Earn a refund
- Protect your assets
- Stop wage garnishments
- Prevent your Social Security payments from being seized
- Qualify for payment plans
- Ensure you get credit toward Social Security contributions based on self employment income — if you don’t file a tax return to report your self employment earnings, you don’t make Social Security contributions, and upon retirement, you may not get all of your Social Security benefits, and if you die, your dependents may also get reduced Social Security benefits.
- Increase your chances of getting approved for some loans — mortgage lenders, in particular, want to see prior year’s tax returns
You also protect yourself. In most cases, the IRS is more favorable to taxpayers who voluntarily file their back tax returns. When the IRS has to hunt you down, the results tend to be worse.
Why You Should Get Help to File Back Tax Returns
You can try to file back tax returns on your own, but if you want the best resolution for your situation, you should work with a professional. As a general rule of thumb, the IRS scrutinizes back tax returns even more closely than it looks at on-time returns. If there are mistakes on your back tax return, the IRS is more likely to notice those errors and assess a higher bill.
Additionally, a professional knows tax laws inside and out. They work hard to make sure that you get the lowest tax liability possible. They also know how to leverage your situation so that you can qualify for penalty abatement, an offer in compromise, an affordable payment plan, or other arrangements that make sense for your situation.
They can also help you to buy more time with the IRS. This can be exceptionally important if the IRS is threatening to place a lien on your credit report, seize your assets, or take other serious collection activity. To protect your current financial well being, you need to get help from a professional as soon as you can.
File Delinquent Tax Returns—Fix Back Taxes
If you have unfiled back tax returns, you may be stressed and worried about what’s going to happen. Luckily, peace of mind and a good night’s sleep is well within reach – you can get the peace of mind you deserve by having the tax experts at Tax Samaritan help you get back into tax compliance.
If you voluntarily file your delinquent returns you’ll likely avoid further problems in the future. It’s in your best interest to file returns for those missing years as soon as possible. The longer you wait, the higher your possible tax liability is going to be.
At Tax Samaritan, We Rescue Troubled Taxpayers
Before anything can be done to extract you from this predicament, all your old tax returns must be filed. Filing an original return vs. an IRS prepared return (a substitute for return) will give you a chance to state what you truly owe. If you haven’t filed a tax return in a while, you may owe back taxes, but perhaps you may even have a refund.
The first step is to gather all of your tax information and documentation for each year you failed to file a tax return. Ideally, you should thoroughly research any missing information to be sure the return you file is as accurate and complete as possible. Tax Samaritan can assist you with this first step by researching with the IRS all the background information that is available on your account which includes all wage and income information that has been reported to the IRS, and we can also help you identify what other information may be needed for your return.
Don’t let the fear of owing the IRS prevent you from filing your return – there are many options if you owe. Take a look at Tips For Taxpayers Who Owe Money To The IRS to learn more.
The tax professionals at Tax Samaritan have prepared thousands of returns for taxpayers. When the IRS wants your money, you need an expert who will protect your interests, and that’s the team at Tax Samaritan. Request a Tax Resolution Services Quote today to get started with back tax filing. You have nothing to lose, and when you get help, you can start sleeping better and reduce your stress loads.