What To Do If You Have Unfiled Tax Returns

Did you know that per statistics in the 2017 IRS Data Book, there were about 14 million delinquent taxpayers at the end of 2016 and 2017? That means that the IRS has identified 14 million people who should have filed tax returns but did not. With that said, falling behind on filing your taxes is something that happens to many people.

We know that this can be scary, and can cause one to have many questions about how to make it right with the IRS.  Luckily, there are steps that you can take to satisfy what the IRS will require of you and get you back into the system so you can get rid of the worry! So, here are 10 things you should know about the situation:

File even if you don’t think you owe. If you were employed with wages and had taxes withheld from your paycheck, it is possible that you may not owe the IRS at all.  This will depend on the amount withheld from your wages and any other deductions you may have (mortgage interest, etc.). If you have refunds, you should actually receive those for the last three years’ returns UNLESS you have amounts owed for other years. In that scenario, the refunds will be applied to any balances due for the other years.

File original returns to replace IRS created returns.  Sometimes, when you don’t file a return, the IRS files one for you.  In IRS terminology, this is called a Substitute for Return (SFR).  Our experience has been that a SFR is the worst tax return ever! It reports the income that shows up on W2s and 1099s but doesn’t give you any deductions or exemptions.  You may already have a bill from the IRS that was created in connection with a SFR.  The good news is that you can correct these returns, and possibly lower the associated tax and penalties, by filing an “original” return.

Gather your records.  When you have old tax returns to file, it is important for them to be as accurate as possible. So the first things you want to do is pull together your records for the years where you did not file.  This may include 1099s or W2’s you received for work your performed, mortgage interest you paid, or interest, dividends and stock sales.  Don’t worry if you are missing records because if you are:

Secure your IRS transcripts. Your records are supplemented by securing the IRS transcripts that will show what has been reported to the IRS. Basically, you want to make sure you report everything the IRS has for your SSN, otherwise, they will send you some notices claiming that you under reported income. Getting the transcripts will cross-check your records, filling in anything that is missing. The appropriate transcript to request is called the Wage and Income Transcript. You can get it via this page on the IRS website and you can request it online or you can use Form 4506-T to request it via mail.

Review the past six years of activity.    If you have six or more years of unfiled returns, make sure you do the above two steps for each year. Why? In most cases, the IRS requires the last six years’ tax returns to be filed as an indicator of being current and compliant.  This is per Policy Statement 5-133 and Internal Revenue Manual 4.12.1.3.  As such, make this your starting point of your analysis.

Review other sources of income. The IRS transcripts are a checking point, but you will also need to check for things that aren’t reported on them. For example, if there is income you earned that is not on the transcripts (e.g. cash payments), you need to make sure you calculate it and include it on your return.

Review your business income and expenses if you’re self employed.  Income can be recalculated using several methods, including 1099 reporting to the IRS or your bank deposits.  Working with this number, determining what you spent to generate that income. When done, take a look at what is left (i.e. the profit). You can then compare that number to what you spent for that year to live (e.g. rent, mortgage, utilities, etc.) to make sure it appears reasonable/logical. Too often, we see tax returns where there is no business profit, which then begs us to ask “so just how did you live that year?” Rest assured, if we can ask that question, the IRS WILL also be thinking of it too!

Perform a financial review if you think you may owe.  Unfiled returns are really a two-step process:

  1. Getting the returns prepared and filed and,
  2. Negotiating solutions for any balances due with the IRS collections division.  

To perform the second step, one has to prepare a financial analysis of their situation and present it to the IRS. This involves a review of your current income, living expenses, property and debts. It is often the case that the amount owed on unfiled returns cannot be repaid. So performing this analysis will help you determine if your “resolution” will ultimately be to enter into a payment plan, request an offer in compromise, or have your account be put in an uncollectible status.

Consider filing the returns separately if you’re married. If you’re married, but only one spouse was responsible for creating IRS debt, strong consideration should be given to filing a separate return. Filing separately can limit who the IRS can collect from – protecting the non-liable spouse.

File your returns in person if possible. If possible, the unfiled returns should be hand-filed at an IRS Taxpayer Assistance Center. Note that the centers are by appointment only so you will need to schedule it via the previous link. If you bring an extra copy to the center, you can get it stamped by the IRS as proof of filing.  If you are working with an IRS Revenue Officer, the returns should be filed directly with that person.  It can take the IRS several months to process the returns. But if you file them directly with their personnel, it can speed up the processing time, which will then “stop the clock” in terms of certain penalties.

If you owe money, the next step is to enter into one of the 10 resolution options solutions to solve your IRS tax debt as discussed on our sister site.

Filing A Late Tax Return With A Refund Due?

If you have not filed your tax return, and you are entitled to a refund, did you know that the deadline for you to claim the refund is 3 years from its due date (excluding extensions)?  For example, if you were due a refund on your 2013 Income Tax Return (which was due April 15th 2014), you have until April 15th 2017 to claim it.  If you don’t file a claim for a refund within three years, the money becomes property of the U.S. Treasury.

Note, there are no interest and penalties for failing to file a return in which a refund was owed.  However, if you have a balance due, those items can be pretty stiff as outlined in this post.

Here are some of the facts you need to know about filing a late tax return in which there is an unclaimed refund:

  • Some people, such as students, part-time workers or seasonal employees may not have filed because they thought they had too little income to require filing a tax return. However, if you did not have a filing requirement, you may still have a refund waiting if you had taxes withheld from your wages.  A refund could also apply if a taxpayer qualified for certain tax credits, such as the Earned Income Tax Credit.
  • The law requires that you properly address, mail and postmark your tax return within 3 years of the due date  to claim your refund.
  • The IRS may hold your refund if you have not filed tax returns that were due at a later date.
  • The U.S. Treasury will apply the refund to any federal or state tax you owe. It also may use your refund to offset unpaid child support or past due federal debts such as student loans.
  • If you’re missing Forms W-2, 1098, 1099 or 5498 for 2012, you should ask for copies from your employer, bank or other payer. If you can’t get copies, get a free transcript showing that information by going to IRS.gov. You can also file Form 4506-T to get a transcript.

This post here will provide the instructions on how to file the return either via paper or using an authorized E-File provider.  If you would like us to assist you, give us a call or visit the main page of our site.  We have the software to file tax returns going all the way back to 2004 so we’re sure we can help you out with any of your old returns.