It’s always best to avoid getting in trouble with the Internal Revenue Service (IRS) in the first place, but sometimes mistakes happen. If you’ve failed to file one or more of your federal tax returns, the IRS may penalize you and require that you fix the issue.
Here’s what you should know about how far back the IRS can go for unfiled taxes, the consequences you’re likely to face when you fail to file returns, and the best way to rectify the situation.
How Does the IRS Audit Tax Returns?
One of the primary ways the IRS ensures that taxpayers fulfill their tax obligations is by conducting audits. That involves verifying the accuracy of the information you report to them to ensure you’ve paid the proper taxes.
Of course, that doesn’t mean the IRS is limited to auditing filed returns they think contain mistakes. Failing to file your tax return altogether by the standard or extended due date will also typically put you on the IRS radar and cause them to take action.
However, they probably won’t immediately audit you for failing to file your tax return unless it’s a recurring issue. Instead, the IRS will usually take the following steps first:
- Impose failure to file penalties and begin charging interest on your balance
- File a substitute return using information reported from third-party sources
- Assess a tax liability based on the substitute tax return and send you the bill
- Start the IRS collection process, levy your wages and accounts, or file a tax lien
You should get regular letters in the mail at each stage of the IRS collections process. Each IRS notice will include the steps you need to take to rectify the problems with your unfiled income tax return and the best number to call if you have any questions.
What is the Statute of Limitations?
If you fail to file a federal return, there’s no statute of limitations on your tax debt for that year. The IRS can always go back, impose penalties and interest on your outstanding balance, and attempt to collect your assessed tax liability.
However, while the IRS can go back to any unfiled tax return, they generally don’t try to enforce filing requirements for returns older than six years. The only exceptions might be if they:
- Find signs of fraudulent or illegal behavior
- Need the information to inform returns for later tax years
- Suspect you have significant tax liabilities in those years
However, failing to file your return typically leads to consequences well before you reach the six-year mark. They usually take action on tax issues within three years of the return’s due date.
For example, if you fail to file your 2020 tax return by April 15, 2021, the IRS will probably come after you and force you to fix the matter by April 15, 2024.
Note that once you file a delinquent return, a statute of limitations clock will begin. The IRS generally has three years to initiate a tax audit for the return. However, they may have six years if you meet an exception like underreporting your gross income by 25%.
In addition, the IRS will have ten years from the date you filed to complete their investigation and collect the balance they’ve assessed. Again, they could do so by levying your wages or bank accounts or imposing a tax lien on your property.
Consequences of Not Filing Tax Returns
Failing to file a return by the due date is a fairly common mistake, but it can be costly, especially if you don’t fix the issue quickly. Here are all the consequences you may encounter:
- Penalties and interest: If you fail to file a tax return for a year that you owe money, the IRS will penalize you 5% of your unpaid taxes for each month you’re late up to 25% of the balance. You’ll also accrue interest on your original amount plus penalties at the federal interest rate plus 3%, compounding daily.
- Increased tax liability: If your tax return is more than a year or two late, the IRS will eventually file a substitute tax return on your behalf. They often ignore a tax credit or deduction you’d take otherwise, artificially increasing your tax liability.
- Loss of refunds: If you fail to file a return for which you deserve a tax refund, you only have three years to collect the amount. In other words, if you file more than three years late, the IRS gets to keep your refund.
- Loss of Social Security benefits: If you’re self-employed and fail to file a tax return, the Social Security Administration won’t credit you for your earnings that year. As a result, your eventual benefits may diminish.
Failing to file tax returns gets worse the longer you wait to fix the issue. If the IRS decides you’re evading taxes or committing tax fraud, they can even pursue criminal penalties. Always act as soon as possible to avoid that and minimize the consequences.
How To File Missing Income Tax Returns
Completing your return for an old tax year can be difficult if the necessary records aren’t readily available. If you’re missing information that you need to complete your tax return, consider:
- Pulling bank account and investment statements for the tax years in question
- Contacting old employers or payers of income for documents like W-2s
- Request a transcript from the IRS for wage info or prior-year tax return details
Also, keep in mind that tax rules change from year to year. As a result, the instructions for completing a current year IRS form may mislead you when completing previous years. Check the IRS resource for prior year products to get more accurate guidance.
Once you’ve completed them, filing delinquent income tax returns with the IRS isn’t much more complicated than filing a current one. Remember, they want you to fix the issue so they can collect any money you owe them.
However, you may not be able to e-file your old returns unless you’re working with a tax professional who can do it for you. If you find that e-file isn’t an option, print out a paper copy and mail it.
Using software to keep track of your finances makes completing your tax returns much easier. Fortunately, Sunrise offers free accounting software for small business. Give it a try today!
Tips for Filing Past Returns With the IRS
Catching up on your tax compliance responsibilities and getting back in the good graces of the IRS can seem like an overwhelming ordeal, especially if you have multiple unfiled tax returns. However, it doesn’t have to be as difficult as you might fear.
Here are some tips to help you get through the process as painlessly as possible.
Take Action Today
One of the primary reasons people get in trouble with delinquent returns is that IRS tax problems tend to compound. Failing to file your tax return one year makes it more likely you’ll do so again in future years, and the longer you wait, the worse it gets.
While that’s partially because it can be harder to complete a tax return if you don’t have your prior-year numbers, it’s also human nature. The longer you wait, the bigger the tax problem becomes and the more intimidating it is to try to fix it.
Unfortunately, ignoring your unfiled returns is the worst thing you can do. Not only will your penalties and interest continue to accrue, but the IRS will be less likely to treat you favorably as time passes.
Even if you don’t know all the steps you have to take to fix everything, start doing what you can as soon as possible. Being proactive will minimize the impact on your finances and earn you some goodwill with the IRS.
Get Help From an Expert
Accurately preparing a tax return is an involved process in the best of times. However, trying to prepare several at once for previous years while missing tax documents, factoring in penalties, and accounting for changing tax law can be a nightmare.
As a result, it’s often worth working with a Certified Public Accountant (CPA) or tax attorney for tax help and legal advice. They can help with the details of filing your returns and minimize the anxiety you may feel by answering your questions.
If you don’t think you can afford professional help, check if you qualify for free tax preparation services. It’s typically available to people who generally make $58,000 or less per year.
Accounting software makes completing your returns much easier for you and your tax preparer. Fortunately, Sunrise offers a free small business accounting app. Give it a try today!
Request Tax Relief When Applicable
If you fail to file because of circumstances outside your control, you may qualify for tax penalty abatement. The IRS grants this kind of relief for reasonable cause, such as:
- Inability to obtain necessary records
- Natural disasters or other significant disturbances
- Death, serious illness, or incapacitation of the taxpayer or a family member
For example, if you didn’t file your tax return because you were in and out of the hospital for months due to cancer, the IRS may waive your penalties. However, you’d need to provide proof of the illness and each stay in the hospital.
Take Advantage of Payment Plans or Negotiate
Failing to file your tax returns can lead to a pretty hefty tax bill. If you owe back taxes for multiple years with significant penalties and interests, you may not be able to pay it all at once.
Fortunately, the IRS lets taxpayers who can’t pay their balances request a free payment plan that grants an extra 60 to 120 days. If you still need more time, you can ask for a long-term installment agreement, though you may incur set-up fees.
Finally, if you feel there’s no way to pay your balance without financial hardship, try to negotiate a tax resolution with the IRS. They may grant you an offer in compromise that lets you settle your debt for less than it’s worth.
Will I Go to Jail for Unfiled Tax Returns?
Failing to file your tax returns is a serious matter, but you typically won’t go to jail for the offense. Most people who fail to file their returns just made a mistake, missed the deadline, or were preoccupied with some other significant life matter.
In these cases, failure to file results in penalties and interest. However, it is possible to go to jail for unfiled returns, especially if the IRS believes you’ve committed tax evasion or tax fraud.
What Happens if You Haven’t Filed Taxes in 5 Years?
Failing to file your returns for five years represents a significant tax issue, and there will be consequences from the IRS. At the very least, you’ll incur stiff penalties and interest if you owe money for the income on those returns.
In addition, the IRS may file substitute tax returns, levy your wages or bank accounts, or file a tax lien on property like your personal residence. In rare cases, they could also attempt to prosecute you, which could cause additional fines or jail time.
Do Back Taxes Fall Off After 10 Years?
Theoretically, back taxes fall off after 10 years. Once you file a tax return, the IRS only has a decade to collect your tax liability by levying your wages and bank account or filing a lien on your property.
Unfortunately, the clock for that limitation doesn’t start until you file your tax return. As a result, it doesn’t apply to back taxes you owe on unfiled tax returns.
Regardless, waiting out the clock isn’t a viable tax solution since the IRS rarely lets liabilities go unaddressed long enough to reach the statute of limitations.
*The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.