Questions about unfiled tax returns? Get answers here
Many taxpayers have questions about unfiled tax returns. Many have not filed tax returns for 10 years. Some even from 15 years ago, or maybe never. They would have questions about unfiled tax returns and rightfully so. Many are worried about what the statute of limitations is on unfiled tax returns. And they wonder if they should file if they owe the IRS money, or if it is better to wait until they can afford to pay the IRS. They are afraid of failure to file penalties, and hope there is some sort of unfiled tax return forgiveness law. Some wonder if they need to file their tax returns for bankruptcy, or for a passport, and if so, how many years do they need to go back for their unfiled tax returns. Some are worried they will be arrested for unfiled tax returns. Others have found out that their deceased father or mother has not filed tax returns in years and now they need to get the tax returns done in order to move the case out of probate but aren’t sure what can be done. And some are worried, wondering if they missed the time to claim a refund from unfiled tax returns. This article will answer all of these, and hopefully will provide your unfiled tax return solution by answering the most frequently asked questions about unfiled tax returns.
What is the statute of limitations on unfiled tax returns? Suppose I haven’t filed tax returns in 10, 15 years. How far do I have to go back?
Would you believe that if you don’t file a tax return, the IRS has forever to assess you taxes? That sounds scary, but because the IRS has limited resources, just like everybody, the policy is that you must file for the last 6 years in order to be in compliance with the IRS. In certain other cases, it may be necessary to speak with a tax attorney to see if you need to go back further. Now, what has changed in the last 10 years, is that the IRS is getting much better at finding people’s sources of income and preparing a Substitute Filed Return (SFR) for taxpayers. So if you have any SFRs against you, it is good to file returns for any of those years, which could well be more that 6 years ago.
What if I can’t pay the taxes I owe on unfiled tax returns. Should I file anyway?
Absolutely! It is not a crime to owe the IRS money, but it is a crime not to file your tax returns (full disclosure: failure to file tax returns is seldom prosecuted, especially as a stand-alone crime). Additionally, in order to settle the back taxes you owe, you need to know what you owe the IRS. And you also need to show the IRS that you can comply with their rules. So this includes filing tax returns for which you owe money. And don’t wait until you can afford to pay the IRS to file your back tax forms. The best possible time to negotiate a tax debt with the IRS is when you have the least ability to pay. In IRS-speak we call this Reasonable Collection Potential, or RCP. Deal when your RCP is lowest, not highest!
What kind of penalties are there for unfiled tax returns?
Well you know how I said it is worse to not file than to not pay? This is how the IRS feels about it:
“The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.”
See? The IRS penalizes you more for not filing your return than for not paying a tax debt. So always file. Then you can work a deal to settle any tax debt. And even your failure-to-file-on-time penalties can be part of an IRS debt forgiveness program.
Do I need to file my my back tax returns if I am filing bankruptcy?
Yes. And also, did you know that you can file bankruptcy to discharge certain individual tax debts. But in most cases, it will only work if you filed for all the years you want the bankruptcy court to wipe out your IRS tax debts for. So even if the bankruptcy court didn’t require you to file your old tax returns, it is in your best interest to file any missing returns you haven’t.
Can I get a passport if I have unfiled taxes?
Probably not. While you likely won’t be denied a passport for owing the IRS back taxes, the state department does check with the IRS to see if you have outstanding unfiled tax returns. Of course, not everyone is required to file a tax return, so certainly the IRS doesn’t block everyone from a passport. But because the process is lengthy, it is foolish not to file back taxes as the potential for denial is likely.
What about refunds. Do I still have time to claim a refund from my unfiled tax return?
If you have some unfiled tax returns and are due a refund for a year you did file, the IRS will send you a Notice CP2566R which states:
“We previously sent you a CP63 notice informing you we are holding your refund until we receive one or more unfiled tax returns. Because we received no reply to our previous notice, we have calculated your tax, penalty and interest based on wages and other income reported to us by employers, financial institutions and others.”
But to understand the statute of limitations on claiming a refund from the IRS, see this earlier article here.
How do I go about filing old returns. Especially if I am missing information?
Of course you can do your own taxes yourself. But probably you need some help with filing your old tax returns — otherwise, you probably would have filed your tax returns when they were due, right? And this is how we prepare tax returns for our clients who are missing records:
- We first pull something called the W&I transcript to find all tax reporting forms like 1099s and W-2.
- We can call city assessors for old property tax bills.
- If our clients are self-employed and have unfiled tax returns, we will have our clients give us their old bank statements and we will recreate profit and loss statements. Now do old returns need to be be 100% accurate? Well, the law states to the best of your knowledge. And that is the standard we follow before signing off on any old tax return and that is required of you as well.
And the same is true if you are the executor or administrator of an estate of someone who has not filed taxes in a long time. We would follow the same process, and then you as administrator or executor, would then sign each return to the best of your knowledge.
Again: File! File now. File to the best of your knowledge. File and never (not) file again! It is o.k. to owe the IRS money. Believe it or not, one million other Americans do! And by filing your old returns, you are one step closer to making that number 999,999 and not owing the IRS any back taxes.