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You may be in the same boat as many people who neglect to file their federal income taxes. At first, you probably expected to catch up when financial times were better. Now, with years of delinquent taxes piled up, the task seems too daunting to tackle.
Penalties for Failing to File
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 having you pay your taxes than sending you to prison. As a result, the IRS rarely prosecutes anyone who comes forward voluntarily to remedy the problem. It may prosecute if there are signs of blatant fraud or you’re a public figure who’s drawn attention to your tax delinquency.
Although the IRS may not fine you or send you to prison, there will be penalties and interest for any tax you owe for previous years. The “good” news is that the IRS can’t assess penalties higher than 25 percent 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.
Reduction in Penalties
You may 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. Here are some circumstances that the IRS might consider to be a reasonable cause:
- Death of a family member
- Mental illness
- Bad advice from your accountant
- Extended military service
Substitute for Return
If you haven’t filed for past years, you may be surprised to learn that the IRS has filed a return for you. This return is called the Substitute for Return (SFR). For a SIR, the IRS will calculate your tax at single or “married filing separate” rates, with no dependents or itemized deductions. You’ll need to amend the IRS return to make sure you take full advantage of whatever deductions might have been available to you in that year.
Fixing Your Tax Mess
The first step in untangling a past due income tax mess is calling the IRS. Before they discuss your delinquent tax returns with you, they’ll want certain personal information identifying you. This information may include your name, address, social security number, employer and current salary.
The IRS will want you to commit to a definite time by which you promise to file all delinquent tax returns. If you find you’re having trouble meeting this deadline, it’s best to call the IRS ahead of time to request an extension.
Additionally, when establishing a deadline, you’ll want to get account summaries from the IRS detailing :
- What returns have already been filed (either by you or by the IRS)
- What taxes you currently owe
- Whether your refunds have been applied to delinquent taxes
You can then file tax returns for each year you were required to file, based on your most accurate estimation of your income, deductions and filing status for each year. If you don’t have paystubs 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.
Has it been more than three years since your tax return was due? Were you eligible for a refund? The IRS won’t let you receive the past refund or credit the amount against any money you owe if it’s been more than three years.
Once you’ve filed all your returns, the IRS can tell you how much tax you owe and the exact amount of penalties and interest. At that point, you can set up a payment plan or discuss an offer of compromise with the IRS.
Question For Your Attorney
- I thought I didn’t have to file taxes for one year, but I was wrong. Can I claim that I had “reasonable cause” since I thought I didn’t have to file?
- 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?