What is the law on unfiled tax return forgiveness & amnesty?
by: Anthony Parent
Let's assume that you haven't filed your personal 1040 tax returns for say 5, 10, or even 20 years. It's possible that you've never filed them. Suddenly, you find yourself in the position where you realize you need to address the issue. It could be a marriage, new job, or the threat of having your passport revoked. Whatever the case, you probably have at least a few questions.
How much time does the IRS have to come after me for unfiled returns?
If you do not file a return, the IRS technically has forever to assess taxes as the statute of limitations of assessment (ASED) does not begin to run. But, some good news! The IRS policy is that if you do decide to get up to date and file old returns, you only need to go back and file for the past 6 years. In some circumstances, you may have to go back a little bit further.
What if I complete my returns and find out I owe money? And what if I can’t afford to pay it?
Even if you find that you owe money, you should still file the return. If you don't have the money to pay, this could be the best time for us to settle your back taxes....not in the future when you actually have money. The only way to settle a tax debt is to first have the IRS recognize it with a tax return.
What are the options to pay back my tax debt?
Many people are very surprised to learn that you can negotiate with the IRS.
Option #1 - An IRS Offer in Compromise: In this case, you negotiate with the IRS to come to an agreement on a lump sum you can afford to pay off your debt. This is a one time payment.
Option #2 - An Installment Agreement: In this case, you negotiate a monthly payment that you can afford. Many times, you don't end up paying the debt in full because the time the IRS has to collect the debt expires.
To learn more about these options, and others, click here.
What if I file my returns and find out the IRS owes memoney?
This is another reason why you want to act quickly. The rules are written totally in the IRS's favor. While the IRS has forever to assess you if you don't file, you only have 3 years from the date the tax return was due, or two years since the date of payment to file a return to claim a refund.
The IRS hasn’t contacted me about my unfiled tax returns. Why should I bother?
While having criminal charges filed against you are a (small) possibility, there is a much bigger reason you should file. When you don’t file your taxes, the IRS basically files them on your behalf using things like 1099s, W-2s, and K-1s. This is called a ‘Substitute Filed Return”. More often than not, the SFR shows that you have a much bigger liability than you actually do! We are almost always able to file much more accurate returns for our clients by factoring in deductions the IRS did not include.
Also, if they file an SFR and you do not sign it, that means they have forever to file and assess you more.
What if I don’t have any records, how can I file my return?
Sometimes people don’t hold on to their records. Sometimes they lose them in a flood or fire. Whatever the case, there is hope. W-2s, 1099s, 1098s, K-1s, etc. are all going to be on your IRS records. You can certainly reference your bank records. We also use an IRS report called a W & I Transcript that tells us all of our clients income and withholdings.
Another great tool is an IRS approved tool to get industry averages if you are missing records. It helps get general guidelines of costs, deductions, etc. It is completely legal and a tool we use in audits when there are missing records.
What if my unfiled returns include foreign accounts?
There are still options! The IRS has created disclosure programs because so many US taxpayers realized that they had foreign accounts that they were supposed to be reporting but never did. To learn about the penalites and different disclosure programs, click here.