Ideally, we should all avoid getting into trouble with the Internal Revenue Service (IRS), but the reality is that tax mistakes can happen to any of us. If you’ve failed to file one or more of your federal income tax returns, it’s best to address the issue before you end up on the line for financial penalties from the IRS.
The IRS usually requires taxpayers to file at least the last six years of tax returns to remain in their good books. If you’ve got significant liabilities, however, the agency can go back further in time and require delinquent taxpayers to file all missing tax returns.
Have unfiled returns? Wondering how far back the IRS can go? Trying to figure out how to get caught up? This article will run through all you need to know about the statute of limitations on unfiled returns, the consequences you’re likely to face when you fail to file returns, and the best way to rectify the situation.
Understanding IRS Statute of Limitations
If you don’t file a federal income tax return, there is no statute of limitations on your tax debt for that year. That means that the IRS can go back as far as they want for any unfiled taxes. In addition to an unexpected tax bill, that could result in the issuing of penalties and interest on your outstanding balance, as well as attempts to collect your assessed tax liability.
However, it’s important to note that while the IRS can go back to any unfiled tax return, in practice they generally don’t touch unfiled returns that are older than six years. At the same time, there are some exceptions to this. Signs of fraudulent or criminal behavior, or significant tax liabilities for the years in question could cause them to investigate older unfiled returns.
In any case, failing to file a tax return often results in repercussions long before that typical six-year threshold. In most cases, the IRS will initiate measures against unfiled returns within three years of the due date of the return.
Since the IRS has an unlimited amount of time to assess tax for a period where no return was filed, you should be diligent with your records. Ideally, you should keep all financial records for any tax year where you didn’t file a return, but if you can keep your records for at least six years back, that should suffice in most cases.
How Does the IRS Find Unfiled Tax Returns?
Audits are one of the main ways the IRS ensures that taxpayers meet their tax obligations. This involves carefully verifying the accuracy of the information you report to the IRS to ensure that everything you’ve reported is true and accurate.
However, the IRS is not limited to auditing filed returns that they may suspect are inaccurate. Simply failing to file your tax return at all, either by the standard or extended due date, can potentially flag your account at the IRS.
That said, individual taxpayers won’t immediately be under audit for failing to file tax returns. That generally happens if it becomes a recurring issue. For a single unfiled tax return, the IRS will usually take the following steps first:
- Impose failure-to-file penalties and start charging interest on your balance.
- File an alternative return using information reported from third-party sources.
- Assess your tax liability based on the substitute tax return.
- Start the IRS collection process, levy your wages and salary, or file a tax lien.
If you haven’t filed a tax return for any given year, don’t panic. You’ll receive letters in the mail pertaining to each stage of the above collections process. Any notice sent to you from the IRS will also detail the steps you need to take in order to address the problems they have found with your unfiled tax return. They’ll also provide contact details, and a number to call if you have any questions.
How to File a Missing Tax Return
Completing a tax return that you missed can be challenging, even if it’s only a few years back. If your unfiled tax return is even older, the prospect can be daunting. But there are some simple steps to follow that can help you catch up on unfiled returns.
First of all, you’ll have to gather all the necessary records and information, including W-2s, 1099s, and other income statements for the tax year you’re filing. If you’re having trouble gathering the information you need, consider pulling bank statements for the year in question or contacting old employers for documents like W-2s. You can also contact the IRS to request your prior-year tax return details.
Once you’ve gathered your documents and completed the necessary forms, filing delinquent income tax returns with the IRS is more or less the same as filing current tax returns. Remember to calculate your own tax liability as accurately and as carefully as you can, and ensure you’ve got the correct mailing address before you send off your documents.
Generally speaking, you won’t be eligible for electronic filing for delinquent tax returns unless you’re working with a tax professional who can provide that service. Always keep a copy of every filed return for your own future records.
Consequences of Not Filing Taxes
While the specifics of a given scenario will ultimately determine the outcome, generally speaking, there are several potential consequences for not filing taxes. Let’s take a closer look at the penalties, repercussions, and other possibilities.
Penalties and Interest Accumulation
The IRS will usually assess interest and penalties when returns are filed late. The failure-to-file penalty is 5% of the taxes you owe per month, up to 25% or five months. Here’s an example: imagine you owe $1,000, then the failure-to-file penalty will be $50 a month, increasing up to $250 in total. This penalty begins to apply the very first day that you are late.
In addition to failure-to-file penalties, the IRS will also charge interest on your account until you pay off the balance. Like those penalties, interest will start to accrue from the very first day your tax return is late. Interest rates are determined by the IRS and can change on a quarterly basis.
It’s important to note that failure-to-file penalties are bigger than failure-to-pay penalties. The penalty for unpaid taxes or late taxes is just 0.5% each month, compared to between 5% and 25% for failure to file. So if possible, you should file taxes even if you can’t pay. If you incur penalties, you can request penalty abatement to have them removed.
Substitute for Return (SFR)
If you fail to file a tax return for a given period, the IRS may seek to fill in the gaps by preparing an SFR. This often involves the IRS seeking your personal and financial information from third-party sources, which may contain inaccuracies. This can often lead to an increased tax liability, leaving you either owing more or receiving less in refunds than if you had filed your own tax return.
As a result, it’s always in your best interest to file your own tax return as accurately as possible. Doing so allows you to take advantage of any potential exemptions, credits, and deductions you are entitled to. If the IRS files taxes on your behalf, you can’t expect the SFR tax forms to include any credits or exemptions.
If you are issued with a notice regarding SFR, there are a few steps you can take to avoid it:
- Submit a completed Form 1040 or any other required tax forms as directed.
- Sign a Consent to Assessment and Collection form.
- Write a letter detailing the reasons behind your failure to file if you are under any special circumstances you feel the IRS should consider.
Tax Liens & Collections
If you fail to pay your tax return, or if the IRS files an SFR that shows a balance due, the IRS will try to collect those unpaid taxes. Depending on the severity of the situation, this could result in a tax lien that attaches to your property or rights to property. It could also lead to more aggressive action, such as a levy on your bank account, or garnishing of wages or income.
Nobody wants to be faced with federal tax collections, and filing your taxes is the first step in avoiding that.
Difficulty Obtaining Loans & Credit
A history of failing to file and pay your taxes could severely diminish your ability to qualify for loans and credit cards. Any lenders that request tax returns to verify your income could view your failure to file as grounds for unnecessary risk on their part.
While this is an indirect consequence, cases of tax-related identity theft are increasing. Failure to file your tax return can increase your risk of identity theft, as scammers can try to file a return for you in order to receive your tax return. This is one reason why the IRS advises taxpayers to file taxes as early as possible.
Loss of Benefits
Failure to file your tax return can result in the loss of certain tax-related benefits, such as the Earned Income Tax Credit (EITC) or Child Tax Credit.
IRS Payment Plans for Unfiled Taxes
For those who are sure that they owe taxes as a result of your overdue returns, it’s important to be aware that you have options if payment is an issue. In fact, the IRS offers taxpayers a variety of tax resolution options in cases where people are genuinely unable to pay their tax balance in full. Depending on the specifics of your situation, you might consider applying to one of the following IRS programs:
- Payment plans for monthly payments on back taxes.
- Offers in compromise to reduce the total amount of your tax liability.
- Partial payment plans that can reduce the balance with monthly payments.
- Penalty abatement options to remove penalties from your account.
- “Currently not collectible” status, which pauses IRS collection until your financial situation improves.
Frequently Asked Questions
How far back can the IRS go for unfiled taxes?
The IRS technically has an unlimited amount of time to assess tax for a period where no return was filed. However, in practice, they usually go back up to six years when enforcing filing requirements.
What are the consequences of not filing tax returns?
Not filing tax returns can result in penalties, interest accrual, loss of refunds, substitute for return (SFR) filings by the IRS, tax liens, and legal consequences. It may also affect your ability to obtain loans or credit.
Can I file previous years’ tax returns online?
Generally, most online tax filing platforms only support filing for the current tax year. For previous years, you will likely need to file your return by mail or hire a tax preparer to help you.
How do I file delinquent tax returns?
Delinquent tax returns can be filed similarly to current returns. Once you have gathered the relevant financial documents, complete the correct tax forms for the specific years and mail them to the IRS. If your financial situation is complex and you can’t complete or gather the information you need, consider seeking the help of a qualified tax attorney.
Can I lose my tax refund if I don’t file my taxes?
Yes, if you don’t file your taxes, you can lose your tax refund. The IRS has a statute of limitations, which is typically three years from the original due date of the return, during which you can claim a tax refund. If you don’t file within this timeframe, you forfeit the opportunity to receive any refund owed to you.
Dealing with Unfiled Tax Returns
While addressing unfiled tax returns is generally a straightforward process, it can easily become complex and confusing depending on the specific circumstances at play. Not to mention, any dealings with the IRS can generate stress on top of the challenges of our daily lives.
For this reason, hiring a qualified tax professional to help with your unfiled or unpaid taxes is a great way to move forward with minimal stress and worry. Experienced tax attorneys can guide you through the process and ensure you don’t miss any other details or tax-related mistakes.
Here at Seattle Legal Services, we’re ready and willing to provide the expert service you need to handle your unfiled taxes comfortably and reliably. To learn more, contact us to schedule a consultation today.