How the IRS Manages Unfiled Tax Returns
Just because you neglected to file your tax returns, doesn’t mean that they were forgotten. We understand that life gets in the way of filing tax returns. People get married; some get divorced. People lose jobs and businesses. Unfortunately, people get sick and they get behind on their tax returns. And while all of this is happening, the IRS still expects full compliance.
When you neglect to file, you may receive a notice from the IRS requesting your return. While the IRS may send this notice shortly after the deadline passes, it typically takes takes about 7-8 months to receive the first notice. After a series of notices issuing warnings, and if the IRS received information from others indicating you received income, it is likely you will also receive IRS Letter 2566—Proposed Individual Tax Assessment. If the 30 day notice deadline for Notice 2566 passes without a response, the IRS will file a Substitute for Return.
What is a Substitute for Return?
The IRS files a tax return in your behalf when you neglect to. Though this fulfills your requirements to file, it is typically not pleasant and many accountants will recommend you file an accurate return. As explained on IRS Notice 2566, the substitute for return assumes worst case scenario. This means the return will use a filing status of “married filing separate” or “single” and you will not receive certain exemptions, deductions, or credits that you otherwise may qualify for if filing your own return.
What are the Penalties for Late Filing?
No matter if you file on your own accord or if the IRS files a tax return in your behalf, the balance due will be subject to late fees.
For each month (or part of the month) your return is late, a 5% failure-to-file penalty will be added to the balance owed. If you file more than 60 days late, the minimum penalty is the lesser of $210 or 100% of the taxes you owe.
In addition to the failure-to-file penalty, you may also be penalized for failure-to-pay. The failure-to-pay penalty is 1/2 of a percent (.5% or 0.005) of the unpaid taxes. The penalty applies to each month (or part of a month) the payment is late. This penalty begins accruing the day after the tax-filing deadline (typically April 15th). If you requested an extension, you will be given more time for filing, but the failure-to-pay penalty still accrues unless you paid at least 90% of the taxes owed by the April deadline.
Though these fees can become rather hefty, it is still worthwhile to file your tax return as soon as possible to stop the failure-to-file penalty from accruing. It’s also a good idea to see if you qualify for penalty abatement. Remember, because the calculations for penalties and interest are based on the balance due, there are no late fees or interest accrued on returns that qualify for refunds.
For more information about yearly deadlines, click below…
What happens if I don’t file?
While not filing taxes is not the worst crime, it is still a crime.
It can lead to the IRS taking some more aggressive measures such as filing tax liens, bank levies, and wage levies. These events can be traumatizing and can potentially affect your quality of life. If the IRS continues to pursue collections unsuccessfully, or if you purposefully disregard their attempts, you also risk the chance of going to jail.
I have Several Years of Unfiled Tax Returns
If you haven’t filed for a number of years, the thought of catching up may be a major source of stress. The good news is, the IRS only requires the past six years of returns for compliance.
Due to the constant changing regulations of the IRS, filing can be quite complicated. If you truly have no idea of where to start, it is best to hire a professional who can help you resolve these issues. Don’t face the IRS alone.
Where to Start
Before beginning the process of filing back taxes, figure out where you left off. Was there a series of years that went unfiled or were your filings more sporadic? Recall from above that the IRS only requires filings from the past six years. This should help narrow your search as you decide what years need to be filed.
Next, find a tax professional who can help you. There are many professionals, such as Private Tax Solutions, who specialize in tax resolution. These professionals can give you peace of mind since they have experience navigating the rules of the IRS.
After speaking with a professional, they may request tax documents for any years that are unfiled (W-2s, 1099s, 1098’s, etc.). To do this, you may need to contact the IRS, state, and your employer.
What if I don’t have any physical records, how can I file my return?
Losing important tax documents may slow you down, but can be resolved easily. The IRS and states maintain files of all reported tax documents. A tax professional can file a Power of Attorney to request these documents or, you can request them online.
If additional information is needed to prepare you tax returns (such as charitable contributions, property taxes, business expense, etc), you can work with your tax professional to contact their parties and/sort through bank statements to find qualifying expenses.
File Your Past Due Returns Now
Delinquent returns should be filed as soon as possible to avoid further accumulation of interest and penalties, protect your finances, and prevent collections. Additionally, the IRS Statute of Limitations limits the amount of time you have to claim a refund to three years from the due date. To avoid sacrificing any refunds, prioritize the past 3 years of unfiled returns.
Do you Have Questions?
For quick expertise, contact Private Tax Solutions office today! Their staff handle numerous cases of back taxes each year and represent hundreds of clients. They are trained to not only file back taxes, but help you resolve outstanding balances with the IRS.