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.

Revenue Agents vs. Officers

One item that taxpayers always get a little confused on is the difference between and IRS Revenue Agent and a Revenue Officer. The two are quite distinct despite the similarities in title. If you are dealing with tax debt, your case may be assigned to a Revenue Officer (RO) at some point. This post will help you understand the difference between the two positions.

Job Description & Duties
Revenue Agents primarily work for the Examination Division. Their job is to conduct tax audits of individuals and businesses as well as trusts and non-profit organizations. Revenue Agents generally conduct tax audits of the most complicated tax returns ranging from small “Schedule C” businesses to the largest multi-national corporations. They are also assigned to the IRS’ Offshore Voluntary Compliance Program to determine whether the failure to file a Form TDF 9-22.1, Foreign Bank Account Report (FBAR) and will be subject to FBAR penalties.

ROs on the other hand work for the Collection Division. Their job is to collect money, or more precisely, collect all that is available. In this post, we go into great depth about the entire collection process and where the RO fits into it.  ROs are assigned to the most difficult IRS tax debt cases. Those individuals or business whom the IRS has been unable to collect from through letters, phone calls and tax levies and garnishments generated by IRS computers are generally assigned to a RO after a period of time.

Qualifications
Revenue Agents have a college degree and are highly trained in all aspects of auditing, tax law, research, and report writing. The minimum requirement for the job generally includes having a bachelor’s degree or higher in accounting from an accredited college or university that included at least 30 semester hours in accounting.  While Revenue Agents are not required to be CPAs, a few of them are.

ROs also must have a have a college degree, but the requirements are different. A RO can have a bachelor of Fine Arts and be qualified for the job. This is why ROs initially engage in months of training and then weeks of training on an on-going basis. It’s no surprise that when it comes to the best ROs, the IRS has a lot of money and time invested in them.

Interested in a job in either role? Check out this additional info from the Bureau of Labor Statistics.

Interesting Facts About Revenue Officers

  • A RO doesn’t carry a badge. If someone flashes a gold badge and says they are from the IRS, that’s not a RO. That is an agent form the IRS Criminal Investigation Division (CID). This means that you are being investigated for a criminal matter and you need to reach out to an attorney! These cases may include tax evasion, fraudulent tax returns, large failure-to-file cases, money laundering, and false documents or statements submitted to the IRS under the penalties of perjury.
  • A RO cannot arrest you. If any CPA, attorney or enrolled agent tells you they can stop a RO from arresting you, find a new professional! ROs have no arresting authority. All a RO can do is make a “referral” to the CID. This means they lay out the facts why they think you should be arrested. Referrals are made when they align with the types of cases mentioned above and the CID only accepts a fraction of them.
  • A RO isn’t graded on how much money they collect. A RO does not get promoted for bringing in the most money. But rather, how many cases they successfully remove from their “inventory” of collections matters. A RO would rather you enter into a resolution option like an offer in compromise today, than be sandbagged for 2 years, even though you wind up paying in full.
  • A RO MUST attempt initial contact in person. Everyone thinks their RO is a total jerk for showing up, unannounced, to make first contact with a taxpayer. But little do most taxpayers know that Internal Revenue Manual Section 5.1.10.3 (Initial Contact) requires that they make first contact with a taxpayer in person. You may not have been home the first time they showed up, so if you are wondering why someone from the IRS left a card for you at your home or on your car, don’t ignore it. There will be further contact!
  • Many ROs are friendly and reasonable. Most employees working for the IRS are normal, hard working folks like you and I. They go to work, attempt to do a good job and then head home to relax just like we do. Thus, understand that they want to close your case and they need your help to do so. They will not “go away” if you ignore them and neither will your problem (it will just get shifted to another part of the process).

Needless to say, if you are uncomfortable dealing with an RO or simply don’t want to talk to them, then give us a call. We’d be happy to talk to them on your behalf and help you (and them) make your tax matter a thing of the past!