Unfiled Tax Returns and the IRS Statute of Limitations
We understand the everyday stresses of life and its demands doesn’t make filing tax returns everyone’s number one priority. No matter the reason if your one of those taxpayers that has not or doesn’t file your income tax returns take notice. By law there are filing requirements and if you meet these requirements you must file a tax return.
If your total income in a given year doesn’t exceed certain thresholds, then you don’t need to file an IRS tax return. The amount of income that you can earn before being required to file a tax return also depends on the type of income, your age and filing status. Go the IRS website for further information.
Can I Lose My Tax Refund If I Don’t File My Taxes?
The answer is yes. You won’t receive a tax refund if you don’t file taxes. Even worse, you can lose your chance to get a refund. You have three years from the filing deadline to claim a tax refund.
For example, someone who was not filing taxes for 2 years can still claim a tax refund for those two years. In contrast, someone with 5 years of unfiled tax returns can only claim a refund for the three most recent years.
If you have three years of unfiled tax returns, you can claim the refunds for all three years. However, if you owe taxes, the IRS goes back a lot further than three years. Losing out on your tax refund is just one of the consequences of unfiled tax returns.
Consequences of Not Filing Taxes
If you haven’t filed taxes and the IRS owes you a refund, the only consequence is that you won’t receive your refund. However, if you have a tax liability and you don’t file, you will face several consequences. Here is an overview of what can happen if you have not filed taxes and you owe a tax bill.
Tax Penalties and Interest
The IRS generally assesses interest and penalties when returns are filed late. The penalty for filing late is 5% of the taxes you owe per month for the first 5 months up to 25% of your tax bill. For instance, if you owe $1,000, the failure to file penalty is $50 a month, and it can get up to $250.
In addition, the IRS will also charge interest until you pay off the balance. The failure to file penalty applies the very first day that you are late, and interest also starts to accrue right away. If possible, you should file taxes even if you can’t pay. The penalty for unpaid taxes or late taxes is just 0.5% each month. On a $1,000 bill, that’s just $5 per month. In other words, if someone files taxes on time but doesn’t pay, their penalty is 10 times less than the failure to file penalty.
Substitute for Return (SFR)
Since the IRS may not have complete information about a taxpayer, it may go ahead and prepare the SFR for the taxpayer and overstate their taxes owed. This often leads to owing more taxes or receiving less refund than if you had filed your own tax forms.
Accordingly, in most cases, it’s in the taxpayer’s best interest to file their own return to take advantage of any exemptions, credits, and deductions they’re entitled to receive. Generally, if the IRS files taxes on your behalf, the SFR tax forms won’t include any credits or exemptions. This unnecessarily increases your tax debt.
The IRS begins the SFR process by sending a letter informing you that they have not received the tax forms for the applicable year(s). Then, the agency proposes a tax liability (i.e. the tax assessment plus additional penalties and interest) based on your income from those years. You have 30 days to do one of the following:
- Submit a completed 1040 or any other required tax forms.
- Agree to sign a Consent to Assessment and Collection form.
- Draft a letter that provides the reasons you are not required to file or any other special circumstances you feel the IRS needs to consider.
If you don’t respond within 30 days, the IRS sends a statute notice of deficiency (SND) known as a 90-day letter. This letter notifies you that the IRS is going to assess the tax debt along with any penalties and interest, and it also informs you of your right to petition the U.S. Tax Court within 90 days of the date of the letter. If you don’t respond to the SND, the IRS can assess taxes and begin collection efforts of the tax debt.
Collection Actions for Unpaid Taxes
When you file a return or the IRS files an SFR that shows a balance due, the IRS will try to collect those unpaid taxes. This means that the IRS may file a lien that attaches to your property or rights to property. The IRS can also take more aggressive action such as placing a levy on your bank account, wages, or other sources of income. The IRS can also seize your property. In some cases, the agency can even take your home if you don’t pay taxes.
Tax-Related Identity Theft
An area of increasing attention is identity theft. If you haven’t filed taxes, it increases your risk of tax-related identity theft. With this scam, someone uses your social security number, files a fake return, and has the refund sent to their bank account. When you try to file back taxes for that year, you will incur processing delays. The IRS advises people to file taxes as early as possible to minimize the risk of someone else filing taxes with your info.
Do I Need to File Back Taxes?
The IRS has very specific rules on who needs to file taxes every year. As of 2022, you must file a tax return if you meet any of the following criteria:
- Your income is over $12,550 and you’re filing as single.
- Your income is over $25,100 and you’re filing as married filing jointly or as a qualifying widower.
- Your income is over $5, and you’re filing as married filing separately.
- Your income is over $18,800 and you’re filing as head of household.
- You owe the alternative minimum tax.
- You owe an early withdrawal penalty from an IRA or 401(k).
- You owe household employment taxes.
- You owe Social Security, or Medicare taxes on tips.
- You have over $400 in net earnings from self-employment.
Note that the income filing threshold is higher for people over the age of 65. For instance, if you’re over age 65 and filing as single, you don’t have to file unless your gross income is over $14,250. The rules are also different for people who are claimed as a dependent on someone ele’s returns.
Keep in mind that these are the numbers from 2022. The income thresholds change every year. To determine if you need to file taxes for a certain year, you need to look at the filing requirement for that year.
Do I Have to File a Return for Every Year I Missed?
In some cases, you may not need to file every year that you missed a return. To give you an example, let’s say that you haven’t filed taxes for five years, and you’re single.
In 2016, your income was $20,000. In 2017, your income was $2,000. In 2018, your income was $30,000. In 2019, your income was $5,000. In 2020, your income was $25,000. You didn’t have self-employment income for any of those years, and you didn’t owe any of the special taxes that can trigger a reporting requirement.
This means that your income was over the reporting threshold in 2016, 2018, and 2020. You must file a return for those years. However, in 2017 and 2019, your income was under the threshold. As a result, you don’t have to file taxes for those years, but you may want to if you are still elgiible for a refund.
What Is the IRS Statute of Limitations on Unfiled Tax Returns?
The tax code provides a distinct statute of limitation (S/L) for assessment, collection, and refunds. The fact that there is a different IRS statute for each type of issue can be confusing to taxpayers. Here is a breakdown of the different statutes of limitations for taxpayers.
Statute of Limitations on Unfiled Returns
There is no statute of limitations on an unfiled return. This means that there is no time limit for IRS to prepare a Substitute for Return (SFR). Even if you hadn’t filed for 20 years, the IRS could theoretically go back through that entire time period and assess taxes against you for any of the years that you owe.
Statute of Limitations on Tax Collection
Once the IRS assesses the tax liability, the 10-year collection statute of limitations applies. This IRS statute means that the IRS has 10 years to collect on a tax debt. There are a variety of different things (such as appealing the taxes) that can pause the statute of limitations. But generally, once a tax bill is more than 10 years old, the IRS can’t enforce collection actions against you
Statute of Limitations on Tax Refunds
The refund statute of limitations technically does not apply to SFRs but on a practical level, the issue is moot since the IRS is not known to make SFR assessments for years where it is clear the taxpayer had an overpayment. As explained above, the statute of limitations for claiming a refund is three years after the filing deadline.
Here are the laws about filing back taxes to get a refund. Sec. 6511(a) and Regs. Sec. 301.6511(a)-1(a) give you three (3) years from the date of filing the tax return to claim a credit or refund, or two (2) years from the date the tax was paid, whichever is later. For purposes of the limitation, a return filed or tax paid before the last day prescribed for its filing or payment (without regard to extensions) is considered filed or paid on that last day (Sec. 6513(a)).
Here’s an example, imagine that you file a return on April 15, 2018, and you owe taxes. You pay the tax bill on October 15, 2018. Eventually, you realize that you made a mistake, and you plan to amend your return so that you can claim a refund. Three years from the filing date is April 12, 2021, and two years from the payment date is October 15, 2020. You get to claim a refund up to the latter date.
If no return is filed, Regs. Sec. 301.6511(a)-1(a)(2) provides the taxpayer must file the claim for credit or refund of an overpayment within two years from the time the tax was paid. For example, consider a taxpayer who has a job and had income taxes withheld that would have entitled them to a refund. Or imagine that the taxpayer is self-employed and has been making larger than necessary estimated tax payments during the year. If the taxpayer elects not to file a tax return for that year, they must file a claim for a refund within two years of the date the taxes were paid.
Statute of Limitations on Tax Collections From Returns Filed After SFR
As explained above, the statute of limitations on tax collection is 10 years from the tax assessment date. This is straightforward when someone files taxes on their own, but it can be more complicated when an SFR is involved.
Say that the IRS prepares an SFR for a taxpayer with unfiled returns. The IRS statute of limitations for collection purposes is 10 years from the date the taxes are assessed. But then, a few months later, the taxpayer prepares and files their version of the return. If the balance due decreases, the collection statute of limitations stays the same.
However, if the new return increases the tax due, the IRS statute for collections resets to the day the return was filed. Now, the IRS has 10 years from the date the return was filed to collect the taxes. Of course, one would have to ask why prepare and file a return to show the taxpayer owes more?
How Do I File Unfiled Tax Returns?
If you’re a taxpayer with unfiled tax returns, you should reach out to a tax professional to help take care of your unfiled returns and back taxes. A tax professional can help you get through the process as easily and as quickly as possible. They understand the rules of how to file back taxes, and they can help you avoid unwanted consequences from your unfiled tax returns.
Alternatively, you can file back taxes on your own. Here is a breakdown of the process to deal with your back taxes. Start by contacting the IRS to determine your account standing with them. Find out who your case is assigned to (if appropriate) and determine whether they have already filed a substitute for return for you.
When you contact the IRS about your back taxes, you can also request and receive your wage and income transcripts for those unfiled years. If an assessment of taxes has already been directed to your account, you should request additional time to file for those unfiled years. Make sure that you file as soon as you can. The longer you wait to deal with unfiled returns, the more likely you become to face unwanted collection actions from the IRS.
To resolve your matter of unfiled tax returns, gather all of the available information you can about investments and any other income in addition to your W2 and 1099 wage and income transcripts the IRS may not have. Remember, your account transcript should also have any estimated payments or other credits made to your account for those unfiled years.
Do a thorough review for those years in question to ascertain any credits, deductions, etc. that you may be entitled to. When you file back taxes, you should use the tax form from the year that you didn’t file. You should not use the current year’s forms. This ensures that you get the credits and deductions that applied that year. The tax code gets changed frequently.
How Many Years of Back Taxes Do I Need to File?
The number of years you need to file depends on how long it’s been since you filed a tax return. For instance, if you have three years of unfiled tax returns, you need to file all three of those years. If you have five years of unfiled tax returns, you should file all five of them. However, if you have 10 years of unfiled returns, you typically only need to file six years of back taxes.
This is why it’s important to work with someone who has experience dealing with unfiled returns. To protect yourself, make sure you or your tax preparer understands IRS policy 5-133 dealing with delinquent returns. This rule maintains that, in general, a taxpayer must only file six years of back tax returns to be in good standing with the IRS.
As referenced previously though, there is no statute of limitations on unfiled returns so the IRS can deviate from that 6-year rule. For instance, if the IRS believes that you have committed tax evasion or fraud or that you owe a substantial amount, the agency may decide to look back more than six years.
How to Pay Back Taxes From Unfiled Returns
If you owe taxes as a result of your overdue returns but don’t have the money to pay, you have options. The IRS offers a variety of tax resolution options for taxpayers who can’t afford to pay their taxes. Depending on your situation, you may want to apply for one of the following IRS programs:
- Payment plan to make monthly payments on back taxes.
- Offer in compromise to reduce the total amount of your tax liability.
- Partial payment plan that reduces the balance and lets you make monthly payments.
- Penalty abatement to remove penalties from your account.
- Currently not collectible status where the IRS pauses collection actions on your account until your financial situation improves.
When you hire a tax professional to help with your back taxes, they can file your unfiled returns, but they can also help you deal with any taxes that you owe. Dealing with the IRS on your own can be stressful and confusing. A tax professional takes the stress of your shoulders. They understand the tax code, the IRS rules about unfiled taxes, and the resolution options. An experienced tax pro can get you the best result for your situation — that’s where the W Tax Group comes in.
Get Help With Back Taxes and Unfiled Returns Now
The W Tax Group accounting team and tax professionals are here so you don’t have to face the IRS alone. We will help you fix, submit and correct your unfiled returns. Our team will make sure to get you the absolute best outcome for your situation. To learn more, contact us today for your free consultation.