Consequences of Not Filing and How to File Past Due Returns
If you forgot to file a tax return this year or if you haven’t filed for years, you’re probably wondering what is going to happen. In most cases, you can fly under the radar for a while, but eventually, the IRS will catch up with you, and the consequences can be severe.
This guide outlines filing requirements and what to expect if you don’t file. Then, it gives you tips on how to catch up with back taxes. To get help now, contact us today at Seattle Legal Services, PLLC.
Consequences of Unfiled Returns If You Owe Taxes
If you don’t file your tax return and you owe taxes, the IRS may issue a substitute for return (SFR). When the IRS generates SFRs, it doesn’t give you any deductions or credits, and in most cases, this leads to an inflated tax liability.
If you don’t respond to the SFR, the IRS will finalize the tax assessment, and then the agency may do the following to collect the tax:
- Issue federal tax liens against your real and personal property.
- Levy (seize) your bank accounts or property.
- Garnish your wages.
Additionally, once the IRS assesses a tax against you, the agency will add on penalties and interest. Both the penalties and interest will be back-dated to the due date of the return.
To give you an example, imagine that your 2021 tax return was due April 19, 2022. You didn’t file, and in 2023, the IRS issued an SFR which shows a tax liability of $10,000. The IRS will backdate the failure-to-file penalties to the filing deadline. These penalties are 5% per month, and they can get up to 25% of your balance, bringing your bill up to $12,500. Interest will go on top of that amount.
Consequences of Unfiled Returns If You Don’t Owe Taxes
If you don’t owe taxes, the IRS doesn’t really care if you don’t file an income tax return. However, if you don’t file, you won’t be able to claim a tax refund. This can cost you a lot of money. In 2023, for example, the average tax refund was over $2,700.
Surprisingly, taxpayers leave a lot of money on the table. At the time of writing, the IRS reports that there were about $1.5 billion in unclaimed refunds for tax year 2019. Luckily, you have three years from the filing deadline to claim a refund. Because the 2019 deadline was extended (due to COVID), filers have until July 17, 2023, to file these returns for a refund.
Other Consequences of Unfiled Returns
Whether you owe taxes or not, unfiled returns have other consequences. Take a look:
- Difficulty applying for loans — Most lenders require you to provide a tax return as proof of income. This is especially true if you are a freelancer or small business owner who doesn’t have a W2 from an employer.
- No statute of limitations for collections or audits — When you file a tax return, the IRS has three years to audit the return (six in cases of fraud) and 10 years to collect the tax. Respectively, this is called the audit and the collection statute of limitations. These statutes don’t start until you file, which means that the IRS can go back an unlimited amount of time to assess taxes against you.
- Possible criminal consequences — If the IRS believes that you have not filed taxes in an attempt to commit tax fraud, the agency may bring criminal charges against you. Although it’s rare, it is possible to go to jail for not filing taxes.
Do You Need to File Taxes?
Not everyone needs to file taxes. You only need to file a tax return if your income is above the standard deduction for your filing situation or if you meet one of the special rules noted below:
- You’re filing as married filing separately, and your income is over $5.
- You owe alternative minimum tax (AMT).
- You owe FICA taxes on unreported tips.
- You owe household employment taxes.
- You have over $400 in net self-employment income.
- You owe an early withdrawal penalty from an IRA or 401(k).
In some cases, the IRS may generate an SFR or send you a notice to file for a year that you aren’t required to file. In that situation, send the agency a letter explaining why you didn’t need to file for that year.
How to File Past Due Tax Returns
Dealing with one tax return can be stressful. A lot of people feel worried and anxious around tax time. And if you’re dealing with years of unfiled returns, this feeling is amplified.
Here’s some great news — in most cases, the IRS only requires you to go back six years. There are certainly exceptions to this rule, but generally, if you file the last six years of returns, the agency will consider you to be compliant. Follow these tips to catch up on unfiled returns:
1. Get tax forms from the right years.
To file past-due returns, you need the tax forms from the years you missed. The IRS updates these forms annually so to ensure you get the right credits and deductions, you need to use the right form. Also, make sure that you’re using state tax forms from the appropriate years.
2. Find proof of income.
Perhaps you didn’t file but you have all of your W2s and 1099s neatly in a folder. If so, it’s time to drag that out. However, that’s usually not the case — Most people with unfiled returns have no idea where their documents are. To get your old income documents, try contacting the payers.
For instance, ask previous employers for old W2 forms and banks for 1099-INTs. If you can’t get these forms from the payers, set up an online IRS account and download a wage transcript. The transcript will give you most of the information you need to file, but unfortunately, it may have the payer’s EIN blanked out, and the state tax info will be missing. A tax professional can help you get accurate, unmasked wage transcripts.
3. Figure out deductions.
If you plan to itemize, you need to gather information about your deductions. This includes qualifying mortgage interest, medical expenses over a certain threshold, charitable donations, and state and local taxes. Even if you don’t itemize, you may qualify to take deductions for retirement contributions, student loan interest payments, and other above-the-line deductions.
4. Gather information about tax credits.
Tax credits are extremely valuable, and you don’t want to miss out on them when you file your tax return. Common credits include the child tax credit, the credit for other dependents, and education credits such as the American Opportunity Tax Credit and the Lifetime Learning Credit. You will need different types of information depending on the credits you are eligible for.
5. Calculate business income.
Small business owners and freelancers will need to calculate their business income. If you have bookkeeping records or a dedicated business bank account, this process is relatively straightforward. If not, you will need to find ways to accurately calculate your revenue and expenses. In extreme situations, you may need a forensic accountant to help you.
To ensure that you file everything correctly and to minimize the risk of problems, consider working with a tax professional. They can help you figure out which returns you need to file, and they can also help you decide if you need to use the IRS’s voluntary disclosure programs or if you can just file late.
Voluntary Disclosure for Unfiled Returns
The IRS has a streamlined voluntary disclosure process for filing delinquent returns, and if you qualify, this program allows you to get into compliance without incurring a lot of penalties.
The agency also offers an IRS Criminal Investigation Voluntary Disclosure Practice. In exchange for coming forward voluntarily, you may be able to avoid criminal charges. This is for people who believe they may have committed a crime by not filing. The IRS recommends that you talk with a tax pro before taking either of these options.
How to Pay Back Taxes From Unfiled Returns
A lot of people don’t file because they don’t want to deal with the bill. If you haven’t filed for years, it can be terrifying to think about how much the bill will be if you submit a bunch of returns all at once.
Conveniently, the IRS has options for taxpayers in this situation. If you file and can’t afford to pay in full, you should consider the following:
- Installment agreement — Take up to six years or until the collection statute expiration date to pay off your tax bill in monthly payments.
- Offer in compromise — Pay a lump sum (or 24 months of payment) to settle your tax bill for less than you owe.
- Currently not collectible — Prove hardship so that the IRS temporarily stops collection actions against you.
You should also ask for penalty relief. Depending on the situation, the IRS may be willing to remove penalties from your account.
Get Help With Unfiled Taxes
Have you got behind on your tax returns? Looking for help filing back taxes? Whether you need help filing personal or business returns, the Seattle Legal Services, PLLC team can help.
We will help you figure out which returns you need to file. Then, we’ll help you gather the right documents so that you can submit accurate returns. Finally, we’ll help you negotiate a payment plan, a settlement, or another arrangement with the IRS.
A lot of people get behind on their taxes, but we know that every situation is different. That’s why we tailor our offerings to the unique needs of our clients. Contact us today to get personalized, empathetic help for your tax problems.