How to Catch Up on Unfiled Tax Returns
Unfiled tax returns are enough to put anyone on edge, but if you have unfiled returns, it's far better to tackle the problem head-on than to wait for the IRS to act—and they will.
Whether you have one late return or several unfiled tax returns, knowing how to rectify the situation can give you the confidence to get back into compliance with the IRS.
Step 1: Gather Your Documents
To file back taxes, you'll need records of your income, wages, investments, IRA contributions, charitable donations, estimated tax payments, and business expenses for the current year and the years that you didn't file in the past six years. Six years is generally the longest you need to keep business tax returns and tax-related documents.
If you don't have documents with information about your income and expenditure, you can request wage and income transcripts from the IRS for those years—including forms W-2 (wage and tax statement), 1098 (mortgage interest paid), 1099 (miscellaneous income), and 5498 (IRA contribution information).
In addition to obtaining records from the IRS, you can also obtain documents from your current and previous employers, vendors, and clients (for self-employment income). You can also check digital and physical bank account statements and look for digital receipts saved in your email inbox for expenses and donations. Use the tax return forms designed for the year of each unfiled return so that any relevant exemptions and tax credits for that year can be applied.
Step 2: Contact a Tax Professional
Once you've gathered your tax-related documents, contact a tax professional in your area who is familiar with federal and state tax laws. Knowledgeable tax professionals can:
Help fill in any missing information and prepare backdated bookkeeping records
Negotiate an appropriate resolution for your unpaid taxes, such as a:
Penalty abatement
Offer in compromise
Payment plan
Financial hardship status
Communicate with the IRS on your behalf and represent you in proceedings in the case (if the professional is an enrolled agent, CPA, or tax lawyer)
Please note that when you see a tax professional, you should take any filed tax returns you have in addition to information about the years that are missing. This will help them to identify additional income or expenses you might have missed and ensure that your tax history is coherent.
Step 3: Submit Your Unfiled Tax Returns and Monitor Return Processing
After filling out your tax return forms with the help of a tax expert, mail them to the Internal Revenue Service or deliver them in person to your local IRS office and make sure you get a confirmation of receipt. This evidence of late filing will come in handy if you are faced with collection and enforcement actions before your case is resolved.
After obtaining a receipt, follow up on your return after six weeks to make sure it has been processed and to find out how much you owe. The sooner you can negotiate a resolution and start making payments on balances owed, the sooner you can breathe a sigh of relief and get on with your life.
Step 4: File All Future Returns On Time
After catching up on unfiled tax returns, make sure you never miss another return. You can do this by setting reminders for yourself, keeping accurate and up-to-date records, and hiring a bookkeeper, accountant, or tax preparer to help you complete an accurate tax return each year. By filing accurate returns on time, you'll save yourself a lot of headaches in the future.
Why It's Essential to File Any Tax Returns You Missed
Catching up on unfiled tax returns can seem like a lot of time and hassle. However, the alternative—not filing—is far worse. If you don't file tax returns:
The IRS can file a substitute return for the years you have unfiled taxes.
You won't get a tax refund (if one is due).
You won't get tax credits, exemptions, or deductions.
You won't be able to claim a capital loss against a capital gain.
You will be charged a failure-to-file penalty if you owe taxes.
You will be charged a failure-to-pay penalty if you owe taxes.
You will be charged interest on the outstanding balance of tax debt and penalties due.
You might not be able to take out a loan or file for bankruptcy (each case is unique).
You may become subject to collection and enforcement actions.
You may be subject to criminal prosecution.
Substitute Returns
For the years you have unfiled tax returns, the IRS will generate a substitute return based on the information they have. Typically, this includes wage and income transcripts and doesn't include credits, deductions, or exemptions. They will notify you by mail that you have unfiled tax returns before generating a substitute return.
The result of a substitute return is that you'll owe far more in taxes than you would if things like credits were taken into account. It's in your best interest to file a previous tax return before a substitute return is generated or as soon as you find out that a return has been generated on your behalf.
Tax Refunds
Taxpayers are only eligible for a tax refund for three years, after which the refund amount is forfeited. Seeing as the average tax return for a family is nearly $3,000, it's definitely worth filing any outstanding returns as soon as you can.
Tax Credits
The Earned Income Tax Credit is available to many low- and middle-income earners and can add up to a significant amount of money. You can only claim this credit as long as you file within three years of the tax return's due date.
Capital Losses
A capital loss can be claimed against a capital gain if it's declared in the same tax year. For example, if you lost $5,000 in an investment property sale last tax year and made $10,000 in the sale of shares this tax year, you need to file your tax return to benefit from the loss.
Please note that short-term capital losses are claimed against short-term capital gains and long-term capital losses are claimed against long-term capital gains. A tax professional can help you calculate gains and losses for the years you didn’t file a return.
Eligibility for Loans and Bankruptcy
If you owe taxes to the IRS, you may be blocked from taking out a loan for real property, a credit card, or a vehicle. You might also be blocked from filing for bankruptcy. In many cases, bankruptcy doesn't save you from federal tax debt.
Failure-to-File Penalty
A failure-to-file penalty is charged on a return for which tax was due. The cost of the penalty is 5% of the outstanding tax per month that the return is late, with a cap of 25%. If the failure to file was fraudulent, the penalty cap is 75%. If no tax was due on the return, the failure-to-file penalty is zero. Keep in mind that substitute returns might still show a tax debt.
Failure-to-Pay Penalty
Failure-to-pay penalties start accruing from April 15 after the relevant tax year. This penalty is 0.5% per month with a cap of 25%.
Interest
Interest is accrued on your tax debt as well as any penalties due. The IRS interest rate is updated quarterly and is currently 4%, compounded daily.
Collection and Enforcement Actions
If you don't respond to warnings and the IRS files a substitute return for you (which will show the highest possible tax debt), they can then begin collection activities. The IRS can legally:
Place a federal tax lien on your real property
Garnish your wages, social security, and vendor payments
Freeze and levy your bank accounts
Seize your investment dividends and retirement savings
Seize personal items of value, including jewelry, boats, and RVs
Criminal Prosecution
In most cases, the worst that will happen when you complete unfiled tax returns is that you'll owe taxes to the IRS and will have to work at paying off the debt. However, you could face criminal prosecution and jail time if you have unfiled tax returns or if you are found to be guilty of tax evasion or tax fraud.
The consequences for criminal prosecution are serious: offenders can be given up to one year of jail time for each unfiled tax return and up to five years of jail time for tax evasion. This really isn’t a good outcome and is definitely not worth the risk.
How to Request an Extension on Your Federal Income Tax Return
If you simply need an extension to prepare your tax return for the current year, it's much better to request an extension than leave the return unfiled. You can do this by lodging Form 4868, which will give you until October 15 to file your return.
The important thing to note about filing extensions is that they apply to filing, not payment. You'll still need to estimate your tax bill and pay by the due date (April 15) to avoid penalties and fines.
Don't Delay—Get Help with Your Unfiled Tax Returns Today
No matter how many years of unfiled tax returns you have, and no matter how nervous you might feel about discovering how much you owe, it's always better to tackle the issue now and file the returns before the IRS generates a return and begins collection and enforcement actions. In many cases, an experienced tax professional can negotiate far more favorable terms and even reduce your penalties and interest. For instance, if you need reliable tax resolution services in Jacksonville, Florida, the team at Golden Apple excels in securing favorable outcomes.
While it's not fun to owe money to the federal government, the consequences of avoiding your obligation can be fierce. Set aside some time, gather your documents, and contact a tax expert today. Unfiled tax returns can and must be resolved.
