The most common call during the tax season and immediately thereafter is from individuals and small business owners who have years of unfiled tax returns. People that call me are terrified that they’re going to go to jail. Going to jail for the failure to file tax returns is understandable considering that the willful failure to file a tax return is a misdemeanor under IRC 7203 and where there is an over act of evasion, the failure to file your tax return may be elevated under IRC 7201 to a felony. Also, your probably aware of some celebrity, like Wesley Snipes, that went to jail for tax evasion.
The good news is that most IRS unfiled tax return cases are civil. If you file before the IRS contacts you and propose a tax settlement, then you can curb and possibly eliminate your criminal exposure.
Below are the most common questions people ask me when dealing with years of unfiled tax returns.
What Should I Do If I Have Not Filed Tax Returns for Years?
In some cases, people and businesses inform me that they have not filed for 10 to 20 years. First, if you do not have a filing obligation, then you have nothing to worry about except missing out on possible refunds. Google the income tax Form’s instructions to help answer whether you have a filing obligation or contact a tax attorney, CPA, or enrolled agent. This blog focuses exclusively on individual and small business federal income tax returns (Form 1040, 1120, 1120-S, and 1065). If you have issues with other forms such as FinCen Forms like 114a, 3520, 5471, 709, 941, 940, etc. then contact an IRS tax attorney immediately to discuss your options.
Although the IRS has an unlimited statute of limitations period to assess a back tax, its policy, not law, is to require that you file six years of tax returns to consider you compliant. To calculate the six-year period, count backward from the current year due. If the IRS obtains managerial approval, you may be required to file unfiled returns beyond the six-year compliance period. A tax attorney can help you determine what returns should be filed.
What if my Unfiled Tax Returns are Reporting that I owe a Lot of Back Taxes I Cannot Pay?
The big mistake people and businesses make is that they do not want to file when they owe money. If you owe money and do not file your taxes, the IRS will assess a failure to file penalty which is 5% of the back taxes owed per month the return is late up to a maximum of 25%. The fraudulent failure to file is 15% percent up to a maximum of 75% of the back tax owed. On top of the failure to file penalty is interest. Getting rid of tax penalties is difficult and not filing your tax return is a costly mistake.
A mistaken belief people have is that they believe when they have money, then the IRS will be more willing to negotiate. This couldn’t be further from the truth. The best time to negotiate back taxes is when you do not have the financial wherewithal to pay. The offer in compromise program is based on your ability to pay not what you owe. If you owe $100,000 in back taxes, but have only an ability to pay $20,000, then the IRS may forgive the remaining amount of your back taxes. If you owe $100,000 and have a $1,000,000 sitting in the bank, then the IRS will not negotiate with you.
It would be bad tax policy to permit people to avoid filing tax returns and then be rewarded with paying a lesser amount owed. Accordingly, if you prepared your taxes and cannot afford to pay, then the best time to work out a tax settlement is now. You may be able to settle your tax debt for less than what is owed, negotiate an affordable IRS installment agreement, negotiate a short-term payment plan, place your account in forbearance, called currently not collectible, or start the clock on bankruptcy discharge. Yes, you can discharge income taxes in bankruptcy if you satisfy certain rules. An IRS tax attorney can help you figure out the best way to negotiate a settlement with the IRS.
What if the IRS Owes me Money and I have Unfiled Tax Returns?
Hurry! The IRS gives you 3 years from the due date of the return, plus extensions, to file your tax returns and 2 years from the date of payment, whichever is later, to claim your refund. If you missed the above deadlines, then you will not obtain the refund. If you owe back taxes from a prior year and run out of time on the refund statute, then IRS will not offset the refund against the amount owed.
What if I do not Have my Records to File my Unfiled Tax Returns?
The first thing that I would do is obtain a Wage and Income Transcript from the IRS to assist in filing your income tax return. The Wage and Income Transcript is an IRS report that shows who paid you what during the taxable year. The Wage and Income Transcript also includes mortgage interest and student loan interest that you paid. Generally speaking, the IRS has three years to audit your tax return from the date of filing. Obtaining a Wage and Income Transcript information helps ensure that you pick up all reported income. If you are a business with missing or lost records, then you should request bank accounts, credit card statements, paypal, or other merchant records to recreate the taxable year. A tax attorney can help reconcile your records or utilize business statistical analysis to assist in the completion of your return.
Why do I need to file if the IRS has not contacted me?
The IRS can arbitrarily file your tax return under IRC 6020. The IRS tax return is known as a substitute for return. The return is usually unfavorable to you because the tax assessment is overstated. The IRS does not care that you owe more, the point is they can only collect what is assessed. The IRS takes information from your Wage and Income Transcript, discussed above, or other information that they obtain, i.e. a prior return’s gross income, and plops the income on your tax return with no deductions. The IRS prepared return results in an arbitrary and often times unusually high, income tax assessment. For example, let’s say you’re a contractor who has not filed your tax returns. The IRS will take 1099s that has been reported and file the gross income return without any tax deductions. Then, the IRS will begin its civil enforcement of the taxes owed. The IRS can levy, garnish wages, file tax liens and begin to collect against the back taxes owed.
Contact an IRS Attorney Today for Help with Unfiled Tax Returns
There is no better way of dealing with an IRS issue, then to act first. Resolving unfiled tax returns prior to IRS contact is ideal. If the IRS sends you a certified piece of mail, you must take action. The IRS may have completed a tax return for you. If so, then it would provide you with the opportunity to dispute the tax before your case goes to collections. Meaning, the IRS cannot take tax action until the issue is resolved in US Tax Court.
If the IRS assessed the tax and sent a certified letter, it could mean the IRS is getting ready to levy or file a tax lien. The IRS provides you 30 days to appeal its levy action by requesting a collection due process hearing. The IRS cannot levy, garnish, or seize property while your case is pending an appeal. Most IRS unfiled tax return cases are civil in nature and can be resolved, but you must act fast. To resolve unfiled tax returns, call tax attorney Todd Unger today (877) 544-4743.