Repercussions from unfiled tax returns can crop up if taxpayers missed filing on or before April 15 of every year. Here’s what you need to know if you have unfiled tax returns.
RELATED: IRS Collection Notices
In this article:
- What the IRS Does If You Have Unfiled Tax Returns
- Unfiled Tax Returns: How Far Back Can You Not File?
- The Disadvantages of Unfiled Tax Returns
- How to File Unfiled Tax Returns
- If You’re Filing an Original Tax Return
- If You’re Working with a Substitute for a Return
Fix Your Unfiled Tax Returns Issues with This Guide
What the IRS Does If You Have Unfiled Tax Returns
The IRS will simply send you notices after assessing your taxes automatically. Here’s what to expect in your mailbox:
- Letter 2566: The IRS sends this first letter to taxpayers who fail to file tax returns. They provide an initial amount of the particular taxpayer’s tax due from the information they have on file, like 1099 and W-2 forms.
This process gives the taxpayer 30 days to file an original tax return, file a consent to the assessment and collection, or inform the IRS why the taxpayer isn’t bound by law to file a tax return.
- Letter 3219-B or Statutory Notice of Deficiency: If the taxpayer fails to respond within 30 days, the IRS sends this letter to notify them the service is prepping to collect the amount. The IRS gives the taxpayer 90 days to file an original return, agree to the tax assessment and collection, or state any missing requirements keeping them from filing
- Substitute Tax Return: When the taxpayer fails to receive those two notices, the IRS prepares a tax return for them from available sources, which is called the Substitute Tax Return. The taxpayer can use this return and it becomes the taxpayer’s original return after.
Taxpayers reserve the right to contest the IRS calculations through a tax court during the whole process. To save time and lessen stress, tax specialists advise their clients to file original tax returns with their own correct calculations after receiving the two notices.
Unfiled Tax Returns: How Far Back Can You Not File?
The IRS only requires taxpayers to file missing tax returns as far back as 6 years. This is good news if you’ve failed to file for a longer period, like a decade or more (though waiting it out is not recommended, of course).
The Disadvantages of Unfiled Tax Returns
Taxpayers who fail to file their tax returns may feel they’ve gained the advantage of deferred payments. But this move carries several disadvantages taxpayers need to know:
- Penalties and Interest: The IRS will charge the taxpayer the appropriate penalty and interest fees for the length of time the return remains unfiled.
- No Tax Refunds: Taxpayers can only claim a tax refund for the year they filed a return. The window for the taxpayer to claim refunds lasts only for 3 years and after that, the taxpayer can no longer claim the amount.
- Low-Trust with Financial Institutions: Banks and creditors rely on tax returns to assess a taxpayer’s ability to pay. When a taxpayer files no returns at all, it tells financial institutions the taxpayer has no income, their income doesn’t exceed $12,000, or they cannot be trusted to pay the loan amount on a regular basis or at all.
- Compromised Social Security Benefits: Tax returns, especially for the self-employed, allow the government to apply the social security credits. Without this information, the taxpayer may find a harder time accessing their benefits in the right amounts when they need them.
How to File Unfiled Tax Returns
If You’re Filing an Original Tax Return
1. Find Out How Many Unfiled Tax Returns You Have and Gather Your Files
Find out how many years you have to file by contacting the IRS.
You need to get all of your tax records. IRS notices, your W-2s, all your statements and receipts during the tax return year in question.
2. Go to the IRS For Missing Documents
In case you have missing documents like W-2s or 1099s, you can opt to get your IRS wage transcript instead.
3. Reconstruct Your Financial Information For Each Year of Unfiled Tax Return
Once you have enough information and evidence to prove your deductions and tax credits, calculate how much tax you actually owe.
4. Speak with a Tax Specialist
You can also speak with a tax specialist to assist you during this crucial time. A tax specialist can protect your interests, prevent you from taking too much liability, or unlock other advantages you’re not aware of.
5. Negotiate on a Payment Plan with the IRS
Finally, you can negotiate with the IRS on how to carry out payments for your unpaid tax obligation. You can opt for installment payment options or an Offer-in-Compromise in case you owe much more than you can pay.
If You’re Working with a Substitute for a Return
1. Check If You’ll Contest or Accept the Tax Assessment
The IRS foregoes factoring in tax credits and deductions when they calculate for a taxpayer’s obligation in a substitute return so the quoted amounts are higher than if the taxpayers did their return themselves. This is why it’s better for taxpayers to file their original returns.
Taxpayers should check if they agree with the assessment and proceed accordingly.
2. Sign If You’re Okay with the Assessment, Prep to Contest if You’re Not
If the taxpayer finds the amount agreeable, they can agree to the assessed amounts and simply sign the consent form to start the collection process. On the other hand, if the taxpayer finds the tax too high, they have the right to contest this amount with the IRS or the tax court.
3. Prepare Your Documents
The taxpayer will need to collect all the notices provided by the IRS, all their W-2s or 1099s, and all their financial statements and receipts to show and prove the correct amount of tax they owe.
4. Speak with a Tax Specialist
Taxpayers should approach accountants or tax court attorneys to represent them to the IRS or the tax court. Since a tax court is only a small court, taxpayers can represent themselves, but this move can prove disadvantageous especially if they are not familiar with tax laws.
Filing unfiled tax returns allows you to stay current on your tax duty and helps you to stay on the good side of the IRS. The peace of mind this brings should motivate everyone to file their tax returns year after year.
What’s your experience with unfiled tax returns? What solution did you apply in order to get those resolved? Give us your answers in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.