Do You Have Unfiled Tax Returns?

By mid-April every year, the IRS requires your return to be filed and any taxes owed paid promptly. You can gain a few months by requesting an extension, but by law, you must file every year.

Waiting to file is never in your best interest, whether you owe money or not.

For every month past the date your tax return was due, the IRS can charge penalty fees.

If you’re owed a refund on unfiled taxes, you must file within three years of the deadline to receive your money.

If you have unfiled taxes from previous years, chances are you want the fastest way to file back taxes. But, filing taxes from prior years can be difficult.

You’ll need to gather documentation on past years’ income and receipts to support deductions and credits. If you are missing records from previous years, many can be requested from IRS. Bank records can also be useful. When we help clients to file past tax returns we use an IRS-approved tool to get industry averages, when records can’t be obtained.

Since the IRS instructions and tax forms for each year are unique, you will need to download and use only the forms for the years you are filing. This is very important—failing to use the right forms can mean having to file again. The IRS instructions will include an address for submitting your late tax return.

The IRS allows registered tax preparers, like Precision Tax Relief, to file returns electronically for the three most recent years.

If you are filing on your own, the IRS requires that you file past years’ tax returns by mail or fax.

If you owe the IRS for past tax years, there are several ways to pay back taxes. Instructions and links are included on the IRS website. If you can’t pay in full, we can help you negotiate a payment plan or a reduced overall IRS tax debt.

In other words, how much time does the IRS have to pursue your unfiled tax returns?

Technically, the IRS can go back as many years as you have unfiled taxes. The ten year federal statute of limitations on IRS collections—the Assessment Statute of Expiration Date (ASED)—does not begin to run until you have filed your taxes.

However, in most cases the IRS will be satisfied when you file the past six years’ tax returns.

Note that the ASED only applies to the IRS; state tax agencies are governed by their own statutes of limitation.

Many people aren’t aware that you can file taxes for as many previous years as necessary. However, the IRS is most concerned with unfiled tax returns from the past six years. Your priority should be to file any returns due during that period.

Note that if you are owed money on your unfiled federal tax return, you can only collect a refund if you file within three years of the original tax deadline.

If you don’t file your tax returns the IRS can file a Substitute for Return on your behalf. As we discuss elsewhere (see “What happens when the IRS files my back taxes?”), an IRS substitute filing is rarely to your benefit.

If you owe back taxes and have not filed, you may face penalties, interest or charges.

There are three circumstances under which you will not face a late filing penalty for unfiled taxes:

1. You file a return that has no balance due
2. You file your return by the regular deadline date
3. You file an extension and file your return by the extended deadline date

Under all other circumstances you can be charged a late filing penalty. For every month or partial month past the filing deadline, the IRS adds a late penalty equal to 5% of the back taxes due, up to 25% of the total tax bill.

You can also face a late payment penalty if you owe back taxes, even if you haven’t filed. The late payment penalty is 0.5% of the tax amount unpaid, up to a maximum of 25%.

Penalties can be negotiated, but interest on back taxes can’t be reduced. Interest is compounded daily and starts to accumulate on unpaid taxes one day after the due date, until all back taxes are fully paid. The interest rate varies and is adjusted quarterly

If you have unfiled tax returns and owe money, the IRS is more likely to impose penalties than a criminal charge. However, by law you can face up to one year in prison and $25,000 in fines for each year of unfiled taxes.

The statute of limitations for the IRS on criminal charges is six years; if the unfiled tax return was due more than six years ago, you cannot be charged.

The chances of criminal prosecution for non-filing are small; for most, the real concern is compounding penalties and interest on back taxes owed.

If you don’t file back taxes, the IRS may file on your behalf. This is called a Substitute for Return (SFR), and often it will not work in your favor. A substitute filing is an estimate and may be incorrect on many levels. The filing status and tax rates may be wrong; the IRS will often omit dependents, deductions for interest, charitable contributions and business expenses.

If the IRS determines that you owe back taxes, they will bill you for the taxes owed, plus penalties and interest. The best way to avoid IRS errors on substitute filings is by filing past due tax returns.

If your employer remits your income tax directly to the government, you’ve been paying what’s called a withholding tax or a retention tax. You may not owe the IRS anything, but you should still file your back taxes to make sure. When you don’t file taxes, you can miss out on refunds or risk the IRS filing on your behalf.

If you have paid income tax through your employer (a withholding tax) and the IRS has determined that you owe nothing, you are safe. You will not be prosecuted or face collections, including levies and liens. You will not be charged penalties or interest. The IRS knows your income and withholdings, and will not pursue you if they determine that you don’t owe back taxes.

If there is doubt, however, the IRS may file taxes on your behalf and (accurately or inaccurately) determine that you do owe taxes. That’s why we always recommend filing back taxes proactively.

You can get a refund and interest from the IRS if you file within three years of the tax return deadline. Unfortunately, the Internal Revenue Code stipulates that you cannot be paid a refund for tax returns filed more than three years late.