If You Haven't Filed Your Taxes In Years

Every year, about seven million taxpayers neglect to file their federal income taxes. That’s about 5% of all taxpayers. Not filing is a big mistake. This is true whether you owe money to the IRS or you’re due a refund.

Bad Things Happen When You Don’t File Your Tax Return

When you don’t file a tax return, lots of things will happen--all of them bad.

You Could Go to Jail

Failing to pay your past due taxes is technically a misdemeanor. You can be fined up to $25,000 for each delinquent tax year and possibly sent to prison for a maximum of one year. However, the IRS is much more interested in collecting what you owe than sending you to prison. It rarely prosecutes nonfilers who voluntarily come forward to remedy the problem. The only exceptions are if there are signs of blatant fraud, or if you're a public figure who's drawn attention to your tax delinquency, a tax protester, a drug dealer, involved in organized crime, or a highly-paid professional.

You’ll Owe Steep Penalties

Although the IRS likely won’t fine you or send you to prison, you will be charged steep penalties as well as interest on the taxes you owe for previous years. You’ll be charged 5% per month on the amount you owe, up to a maximum of 25% reached after five months—that’s a 60% annual interest rate. This is in addition to the interest of about 3%. You’ll also have to pay a failure-to-pay penalty of 0.5% of your unpaid taxes for each month the taxes are not paid. This penalty can be as much as 25% of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% failure-to-file penalty is reduced by the amount of the failure-to-pay penalty. Thus, the "good" news is that the IRS can't assess penalties higher than 25% of the tax due for a particular year. However, interest continues to accrue on top of the penalties. This amount can add up quickly, especially for taxes that are several years overdue.

You might be able to persuade the IRS to reduce your penalties. You'll have to prove you had reasonable cause not to have filed your tax returns. Example of circumstances that the IRS might consider to be a reasonable cause include:
  • death of a family member
  • mental illness
  • alcoholism
  • bad advice from your accountant, or
  • extended military service.
You Could Lose Your Tax Refund

If the IRS owes you a refund for the tax year, you won’t be charged any penalties for failure to file a return. However, if you don’t file a return for that year, then within three years of the return due date you’ll lose your tax refund. The IRS will simply refuse to pay it to you. The same rule applies to a right to claim tax credits such as the Earned Income Credit.

You Won’t Be Able to Get a Loan

You’re going to have a lot of trouble buying a home, getting a business loan, or obtaining financial aid to go to college. Copies of your most recent tax returns are required to obtain these loans. No one wants to loan money to someone who can’t be bothered to file a tax return.

The Statute of Limitations Won’t Apply

If you file your tax return, the IRS normally has three years to audit you, or six years if you omitted more than 25% of your income. However, the statute of limitations does not start until a return is filed. In other words, there is no statute of limitations if you fail to file your tax return.

The IRS Can File a Substitute Return

If you haven't filed for past years, the IRS can file a substitute return for you. When the IRS does this, it calculates your income tax for you, with you filing as a single individual with one exemption. Obviously, this substitute return may not give you credit for deductions and exemptions you may be entitled to receive. The IRS will also send you a Notice of Deficiency CP3219N (90-day letter) proposing a tax assessment based on the substitute return. You will then have 90 days to file your past due tax return or file a petition in Tax Court. If you do neither, the IRS will proceed with the proposed assessment. If you don’t pay the assessment, the IRS has many powerful collection tools at its disposal. These include placing a levy on your wages or bank account (meaning the IRS gets part of your wages or the money in your bank account), or filing a federal tax lien which will make it impossible for you to sell real property without first paying off the lien.

If the IRS files a substitute return, you should still file your own tax return. This way, you can take advantage of any exemptions, credits, and deductions you’re entitled to. The IRS will generally adjust your account to reflect the correct figures.

Fixing Your Tax Mess

You should file tax returns for all the prior years you missed based on your most accurate estimation of your income, deductions, and filing status for each year.

First, gather all your records for those years. If you don't have pay stubs or W-2 forms detailing your income for years past, you may be able to reconstruct what you earned based on old checkbook registers or other similar documentation. You can also complete Form 4506-T, Request for Transcript of Tax Return, and check the box on line 8. The IRS will provide a transcript with information from your W-2s or 1099s filed in past years by your employers. If you need information from a prior year tax return, use the IRS Get Transcript link to request a return or account transcript. This way you can find out:
  • what returns have already been filed (either by you or by the IRS)
  • what taxes you currently owe, and
  • whether your refunds have been applied to delinquent taxes.

File your returns for the delinquent years and pay as much of the back taxes and penalties as you can. If you can’t pay it all, contact the IRS to work out a payment plan. This can include an installment plan in which you pay your tax bill over time, or an offer in compromise in which the IRS accepts less than the full amount you owe. However, the IRS will reduce your tax bill only if you convince it you aren't able to pay the full amount. You can call the IRS at 800-829-1040. The IRS website also has extensive information about installment plans and offers in compromise.

Questions For Your Attorney

  • What if there's no Substitute for Return filed for me? Should I be worried?
  • What do I do if I don't agree with the determination from the IRS as to how much I owe?
  • How can I get the IRS to reduce the tax penalties it is charging me?

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