Will Filing Past-Due Returns Trigger IRS Problems? 

If you haven’t filed one or more tax returns and the IRS hasn’t seemed to notice, you might wonder whether it’s worth filing these past-due tax returns. After all, if it’s been a few years since they were due and nothing’s happened, you’re probably fine, right? 

Then there’s the thought that filing an overdue tax return might catch the IRS’ attention and cause you to get into trouble when things are fine. This is an understandable fear, especially if you think that those tax returns will show that you owe money to the IRS that you can’t afford to pay.

These are common feelings for many taxpayers with unfiled tax returns – some taxpayers even worry that hiring a lawyer might make the IRS suspicious. But the truth is that filing late tax returns is almost always the best way to avoid bigger problems with the IRS. For example, filing a late tax return might lead to a tax bill, but purposely avoiding a tax return could lead to jail time. Read on to learn why you may or may not be required to file a tax return, what happens if you don’t file a tax return, and why filing a missing tax return is usually the best thing to do. 

Key Takeaways

• If you haven’t filed a required tax return, the IRS likely already knows about it.
• The longer you go without filing a past-due return, the worse your tax problem will be, which can include increased penalties, interest, and even criminal charges in rare cases.
• Whether or not you’re required to file a return doesn’t depend on whether you owe money, but instead, a combination of factors such as your gross income, your source of income, your age, and your filing status.
• If you don’t file a tax return, the IRS will send reminder notices. If you ignore these, you can expect the IRS to file one for you with a substitute for return (SFR).
• Filing a tax return is usually a good idea even if you don’t owe taxes as it’s required to obtain a tax refund and can help you apply for loans for school or a home. 

The IRS Probably Already Knows You Didn’t File 

If you’re legally required to file a federal tax return and haven’t, the IRS probably already knows. This is because the IRS receives income information from third parties through W-2s and 1099s.

If the IRS knows you didn’t report income with a tax return, then why haven’t you heard from the IRS? It’s probably because their enforcement system hasn’t gotten to your case yet. It sometimes takes a few years before the IRS will contact a taxpayer about a missing return, usually with a CP59 Notice. 

What Happens If You Don’t File 

If you ignore the CP59 or other reminder notices (such as CP515, CP516, or CP518), the IRS might file a return for you. They will likely use a substitute for return or SFR. This sounds like they’re doing you a favor, but it’s the complete opposite.

Because the IRS won’t have all of your financial information, they’ll make up assumptions for you, such as your filing status. They’ll also ignore tax information that could lower your tax bill, such as deductions, claiming dependents, and credits. In other words, if you’re eligible for a tax benefit, the IRS won’t claim it for you with an SFR. As a result, you’ll end up with a larger tax bill than necessary or owing money when the IRS owes you a refund.

Besides having an SFR filed for you, what else could happen if you don’t file a tax return with the IRS? It depends on if you owe money to the IRS and if you were legally required to file a tax return in the first place. 

You Owe Taxes and Don’t File 

If you owe taxes to the IRS and don’t file a tax return, in addition to owing the underlying tax, you’ll also owe penalties. The two biggest penalties will be:

• Failure-to-File: This is 5% per month for any unpaid tax balance, up to a maximum of 25%.
• Failure-to-Pay: This is 0.5% per month for any unpaid tax balance, up to a maximum of 25%.

If you owe both these penalties, the failure-to-pay penalty reduces the failure-to-file so the maximum combined penalty rate for each month is 5%, but over time, they will stack and can reach a combined 50% of your tax liability. 

In addition to these penalties, you’ll have to pay interest, which applies to both the unpaid tax balance and penalties. The interest will be backdated to the original due date. Put another way, the longer you wait, the bigger your tax bill.

Another problem with not filing taxes when you owe money is that you won’t be eligible for certain forms of tax relief, such as:

• Installment agreements
• Offer in compromise (OIC)
• Penalty abatement

If you go long enough without filing your missing tax returns and not paying your tax bill, you can expect one or more of the following IRS enforcement actions:

• Bank levies
• Wage levies
• Tax liens
• Passport revocation (or passport application denial) 

You Didn’t File Because You Didn’t Owe 

This is an important point to discuss because your legal duty to file a tax return doesn’t depend on whether you owe taxes or not. Instead, it’s based on the following factors:

• Your gross income;
• Your filing status;
• Your source of income;
• Your age; and
• Whether you’re a dependent.

Depending on how these factors combine for your particular situation, you may be required to file a tax return. The filing requirement applies regardless of whether you end up owing taxes or not. 

Why It’s Usually a Good Idea to File a Tax Return 

Whether you owe money to the IRS or have no legal requirement to file your taxes, it’s almost always a good idea to do so. 

Situations Where You Owe the IRS Money

Besides reducing any penalties you might owe or making it easier to request tax relief, there are two important reasons to file past-due tax returns. The first is starting the time limit clocks that the IRS has to assess and collect tax from you.

Generally speaking, the IRS has 10 years from the date a tax was assessed to collect the tax from you. This is the Collection Statute Expiration Date (CSED). The key here concerning filing tax returns is that the 10-year clock doesn’t start until there’s a tax assessment and the IRS can’t assess a tax until you’ve filed a tax return. The IRS filing an SFR that leads to a tax bill doesn’t count as a tax assessment. So until you file a tax return, this CSED clock can’t begin to run.

The IRS also has a time limit on how long it can assess a tax against you. This is typically three years from the date the tax return was due or the date the IRS received the tax return, whichever is later. This is called the Assessment Statute Expiration Date (ASED).

Until you file a tax return, none of these deadlines apply to you. By filing your past-due tax returns, you can start both these clocks, which may become a useful negotiating tool in the future if you’re trying to resolve an unpaid tax debt with the IRS.

The second important reason only applies if you’re not a U.S. citizen. Becoming a U.S. citizen requires you to demonstrate good moral character. If you owe money to the IRS and haven’t filed necessary tax returns, this will make it much harder (if not impossible) to obtain citizenship when you apply for naturalization. 

Situations Where You’re Not Required To File (But Still Should)

Assuming for a moment that you don’t have to file, there are several reasons why it may still be in your best interest to do so.

First, the IRS may not know about relevant changes in your life. Last year you earned enough to have to file, but you were single. This year, you earned the same amount of money, but you got married. This means the income filing threshold doubled (assuming you apply a joint filing status to your situation). But if the IRS doesn’t know you got married, they won’t know this higher threshold applies.

Second, you want to avoid an SFR. You can clear things up with the IRS after the fact, but it’s a lot easier to file a tax return before this happens.

Third, if you’re eligible for a tax refund, you have to file a return to claim it. This is especially true with refundable tax credits, such as the Earned Income Tax Credit (EITC). If you wait too long to file the tax return (usually you have three years), then you lose the refund.

Finally, having filed a recent tax return can be helpful financially. For instance, when applying for a loan for a home or financial aid for higher education, you may need to provide copies of recently filed tax returns. 

When Not To File a Missing Tax Return 

Filing a missing tax return rarely causes an increase in problems. In situations where it does, that problem already exists and any problem that arises from filing the tax return will generally be smaller than if you never filed it in the first place.

The only major exception to this rule is if filing a tax return could somehow be used against you in a criminal or civil proceeding. In this case, you’d want to talk to a criminal and/or tax lawyer about weighing the advantages and disadvantages of filing a tax return and what it means for your criminal or civil case. You may need to consider the Voluntary Disclosure program at this point.

Even if these rare situations apply to you, you’re still likely better off filing the missing tax return. However, you probably want the help of an attorney to advise you on what information to include (or not include) on your tax return. For example, if you have illegal income, you might still need to report it on your tax return, but there may be a way to do so without revealing the source of the income. 

Our Legal Team Can Help You With Your Unfiled Tax Returns 

The bottom line is that the biggest risk comes from not filing a tax return, not the tax return itself. By filing a tax return, you can increase the control you have as to what happens to you and your tax case. As long as you have unfiled tax returns, your options or limited. To learn more about whether you have past-due tax returns (and if so, the best way to handle them), contact the legal tax professionals from the W Tax Group to schedule a free consultation.

Filing Past Due Returns FAQs 

What happens if I file a tax return from 5+ years ago? 

If you owe taxes, then you face the prospect of paying not just the taxes you owe, but also penalties and interest. If it turns out you didn’t owe taxes for the tax years you didn’t file a tax return, then you most likely don’t have to worry about paying any penalty (or interest). 

Can I still get a tax refund if I file a late return? 

For the most part, you only have two years from the date you paid the tax or three years from the return’s due date (whichever is later) to claim a refund. If you miss this deadline, then you’ve likely given up your right to the refund unless you have a valid reason for not filing a late return sooner.

Will filing now lead to an IRS audit? 

Filing a late return could attract extra attention from the IRS, but it’s not a commonly recognized audit red flag. If you do file a late return and it gets audited, it will most likely be because there was an anomaly with information on your return or a tax benefit claimed, not because you filed it late. 

What is an SFR and how does it hurt me?

An SFR is short for substitute for return and it’s a tax return the IRS files for you, which is not a good thing. That’s because the IRS makes assumptions about your tax situation, and these assumptions aren’t in your favor. This will often lead to you having a bigger tax bill than if you filed your return yourself. 

Do I need an attorney to file a past-due tax return? 

You don’t, but it might be a good idea to talk to one if you knew you had to file prior tax returns and chose not to. It would be wise to talk to a tax lawyer to get a better understanding of any legal liability you might face and avoid any self-incrimination.

Even if legal trouble isn’t a concern, hiring a tax attorney could be a good idea if you’re dealing with a complicated tax situation, expect a large tax bill, or are missing important tax documents. 

What if I don’t have my old tax documents? 

Depending on what you’re missing, you might be able to contact relevant third parties to get additional copies, such as a bank or payroll company. If you can’t get another copy, then you can try estimating certain information, such as your income. Depending on your tax case, you might need to fill out IRS Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, Etc.

If you file your late tax return with estimated information and later find out those estimates were wrong, you may need to file IRS Form 1040-X, Amended U.S. Individual Income Tax Return. Filing a tax return without necessary documents is challenging, but a tax pro can help. 

Will the IRS contact me after I file an old tax return? 

If you file a properly prepared tax return with any necessary payment arrangements, then you shouldn’t expect the IRS to contact you after filing the old tax return. But if there’s a problem with the return, you can expect some sort of response. Not sending payment or making arrangements to pay your tax balance will lead to a tax bill and incorrect or missing information could result in an audit letter.

Is it better to wait until I can pay before filing? 

Not usually, as filing as soon as possible may reduce the amount of penalties and interest you have to pay. It also serves as evidence of your good-faith efforts to comply with your tax obligations. Getting a return sent to the IRS sooner rather than later might also reduce the chances of other negative consequences, such as the IRS filing an SFR, taking collection actions against you, or suspecting tax fraud or evasion. 

How far back should I file missing tax returns?

Although there’s no statute of limitations for unfiled tax returns, you’re usually only required to file no more than the most recent six years’ worth of tax returns to be in compliance with the IRS. One exception to this six-year compliance rule is if you owe a significant amount of income. In this situation, the IRS might ask that you file missing tax returns that are older than six years. 

Do I still need to file if I truly didn’t earn that much money? 

It depends on how much money you made and how you earned it. For instance, if you’re self-employed, then earning more than $400 means you need to file a return. If you’re a W-2 wage earner, then you might have to file if your gross income exceeds $14,600 and your filing status is single.

Despite not having to file, you might still want to do so if you think you should receive a tax refund, want to claim certain tax credits, or need a tax return for another reason (like getting a loan for school or buying a home).

Sources

– https://www.americanbar.org/groups/business_law/resources/business-law-today/2022-may/irs-audit-risk-how-to-reduce-it/
– https://www.irs.gov/pub/irs-news/fs-08-12.pdf
– https://www.irs.gov/filing/time-irs-can-assess-tax
– https://www.taxpayeradvocate.irs.gov/tax-terms/refund-statute-expiration-date-rsed/
– https://www.irs.gov/businesses/small-businesses-self-employed/filing-past-due-tax-returns
– https://www.irs.gov/newsroom/how-to-file-when-taxpayers-have-incorrect-or-missing-documents
– https://www.irs.gov/newsroom/how-to-file-when-taxpayers-have-incorrect-or-missing-documents
– https://www.irs.gov/compliance/criminal-investigation/irs-criminal-investigation-voluntary-disclosure-practice
– https://taxcure.com/tax-problems/unfiled-tax-returns/six-year-rule
– https://www.irs.gov/businesses/small-businesses-self-employed/notices-for-past-due-tax-returns
– https://www.irs.gov/individuals/check-if-you-need-to-file-a-tax-return
– https://www.irs.gov/publications/p501#en_US_2024_publink1000220687
– https://www.taxpayeradvocate.irs.gov/tax-terms/assessment-statute-expiration-date-ased/#:~:text=If%20you%20fail%20to%20file,to%20assess%20any%20additional%20tax.
– https://taxfoundation.org/blog/irs-guidance-thieves-drug-dealers-and-corrupt-officials/

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg