If you have unfiled tax returns, the consequences often vary based on how many years you are behind. The further you get behind, the worse the consequences can be and the harder it becomes to catch up. Luckily, however, even if you’re 10 or more years behind, you generally only have to file the last six years of returns to get back into the IRS’s good graces.
Regardless of why you didn’t file your tax returns, you may be worried about the consequences and scared that the IRS is going to come after you. The good news is that you can catch up, and if you’re proactive about filing before the IRS contacts you, you may be able to minimize the penalties against you.
To get help dealing with back taxes, contact us today. At Damiens Law, we are a boutique tax resolution firm that works hard to customize the most effective solution possible for each of our clients.
Key takeaways
- One to two years of unfiled returns – Late payment and filing penalties will start to reach about 50% of your tax liability.
- Three years – If applicable, you forfeit your ability to claim a refund after three years.
- Several years – The IRS may issue a substitute for return any time after the deadline, but it usually takes a few years.
- Six-year compliance rule – Typically, you only need to file the last six years to get back into compliance.
- Statute of limitations – There is no deadline for the IRS to take action on unfiled returns. The agency can go back an unlimited number of years.
Consequences of Not Filing by the Year
If you don’t file your tax returns, the exact consequences vary based on the situation. But here is an overview of what to expect:
One to Two Years – Penalties
The IRS will add failure-to-file penalties if you don’t file. The penalty is 5% of the unreported tax liability, assessed monthly, and it can get up to 25% of your balance. However, because the penalty is based on the tax due, the IRS cannot actually assess it until you file – once you’re five or more months behind, this penalty maxes out.
For instance, say that you owe $10,000 and you file years late, you will incur the maximum late filing penalty of 25% (so $2,500 in this case).
You will also incur late payment penalties of up to 25%. These penalties are .5% per month and then increase to 1%, so they typically max out around the two-year mark.
These penalties stack on top of each other. If you owe taxes and file your returns two or more years late, the total penalty may be around 50% of the balance, and there will be interest on top of that amount.
Three Years – Loss of Tax Refunds
Again, if you file three years late and you owe tax, you will incur penalties as explained above. However, if you’re eligible for a tax refund, the three-year mark is your last chance to claim it.
You only have three years from the original due date to collect tax refunds. This rule also applies if you want to amend an old tax return to get a refund.
Five or More Years But Maybe Sooner – Substitute for Return
The IRS can take the financial records that it has received on your behalf and use them to prepare a substitute for return for you. Then, the agency will send you a tax assessment letter showing how much you owe. If you don’t respond, the agency will send a statutory notice of deficiency and start the collection process against you.
The IRS can issue a substitute for return at any point after the extended due date (October 15th for individual income tax returns) if it has received documents from other parties about your income. However, generally, several years must pass before the IRS takes this type of action.
For instance, in early 2024, the agency announced plans to reach out to high-income taxpayers who had not filed a return since 2017 – at that point, these returns were nearly six years late.
After Assessment – Involuntary Collections
Regardless of how long it’s been since you’ve filed, once the IRS assesses tax against you, the agency can and will start involuntary collections. Luckily, once you receive the SFR and the notice of deficiency, you still have time to take action – you have 90 days to appeal the SFR or file a correct return.
However, once the tax is assessed, either after an SFR or because you filed a return, the IRS can attempt to collect it without your cooperation. This is referred to as involuntary collections, and the actions the IRS can take include issuing tax liens, garnishing your wages, seizing your bank accounts, or taking your assets to auction them off.
Other Financial Consequences of Not Filing
Beyond any actions that the IRS takes, you may suffer consequences to your personal finances if you have several years of unfiled returns. In particular, a lot of lenders want to see your tax returns as proof of your income, and not having returns can make it hard to get loans. You may also struggle to rent apartments or obtain certain jobs.
How to Catch Up With Years of Unfiled Tax Returns
If you’re several years behind, here’s what you need to do to catch up.
- Figure out how many years you need to file – The IRS’s six-year compliance guideline means that most taxpayers only need to file up to the last six years. In other words, if you have three years of unfiled returns, you only need to file three years, but if you have 10+ years of unfiled returns, you may only need to file six years. Talk with a tax pro for guidance.
- Find tax forms or tax prep software for the years you didn’t file — The forms change annually, so you can’t use current forms to file returns from other years. Most major online tax prep software has the current year and the two previous years available online, with downloads available for the current and previous six years.
- Find income and wage documents – You can get copies of wage and income documents by setting up an online tax account with the IRS – you can generally find the last 10 years of income documents online.
- Reconstruct business records — If you are a freelancer or small business owner, you will need to reconstruct your income and expenses so that you can file a Schedule C with your tax return or if applicable, a partnership Form 1065 or a corporate Form 1120.
- Review the deadlines — Again, you can file old tax returns at any time, but if you want to claim a refund, you must file within three years of the original due date.
- Fill out the forms and file — Ideally, you should file all of the returns at the same time. Then, you will have your total amount due and will be able to make payment arrangements or other plans.
- Contact the IRS about penalty abatement — If you owe, the IRS will automatically add late filing and payment fees to your account, but you should ask to have as many fees abated as possible.
If you file a business return, such as a Schedule C or a corporate or partnership return, a tax professional can help you catch up on those returns as well. If you have well-organized bookkeeping records, sales invoices, and bank account statements, this process should be relatively straightforward. If not, you may need to hire a tax pro who can help with historical bookkeeping.
Your tax pro can also advise you about other returns you may have missed, such as payroll returns for your business or foreign disclosures that you forgot to file with your income tax return. If necessary, they can guide you through the voluntary disclosure program. This is for people who want to minimize penalties and criminal consequences when catching up on certain types of unfiled returns.
What if You Can’t Afford to Pay?
Worries about paying the tax bill are one of the main reasons that people get behind on their tax filing requirements. However, once you file, you can contact the IRS about setting up a monthly payment plan or applying for a lump sum settlement on your taxes.
Here are the main options:
- Installment agreement — Make monthly payments for up to six years and even longer in some cases.
- Offer in compromise — Pay a lump sum or 24-monthly payments to settle your tax debt for less than owed.
- Currently not collectible — if you can’t afford to pay, the IRS will give your account CNC status and pause collection actions against you.
Your tax professional can also help to reduce the balance by asking for penalty abatement. They can help you look at other options as relevant to your situation.
FAQs About Years of Unfiled Tax Returns
When people contact us about unfiled tax returns, they often have a lot of the same questions. To point you in the right direction, we’ve gathered some of the most common questions.
How many years back can you file taxes?
You can file a tax return for any year, but usually, you only need to file the last six years. Even if you haven’t filed for decades, the IRS usually lets you catch up by getting compliant with the last six years.
Are there exceptions to the six-year compliance rule?
The IRS may require more than six years of returns if you are a high-income earner or if you have unfiled returns related to taxes collected from other parties. For instance, if you withheld payroll taxes from your employees’ pay but haven’t filed payroll returns in eight years, the IRS will require all eight years.
The six-year rule is just an administrative guideline, not a law. That means it’s subject to the IRS employees’ discretion.
What if you don’t file taxes for two years?
If you are required to file, and you don’t, you can face monetary penalties for not filing. The late filing penalty is at least $435 or 25% of your balance due. There are also penalties for paying late. Additionally, you won’t have proof of your income for lenders or other requesters. Finally, if you were due a tax refund, you won’t receive it until you file.
What happens if you don’t file taxes for five years?
The IRS may file a substitute for return and assess a tax bill against you. Then, the agency can take drastic steps (garnishments, seizures, etc) to collect the money from you. If you decide to catch up, you will only be able to claim refunds for the last three years, not the two years before that.
What happens if you never file taxes?
If you never file taxes, you can end up in the underground economy. To avoid being found by the IRS, you may end up working cash-only or under-the-table jobs, which are illegal, low-paid, and afford you very few worker rights. Additionally, you will struggle to get a loan to buy vehicles or a home.
How many years can you go without filing taxes?
Some people go decades without filing their tax returns. If your income is below a certain threshold and you don’t trigger any of the other filing requirements, you are not legally required to file. However, you will miss out on refunds. Also, you won’t have financial documents to prove your income to lenders.
How will the IRS know if I don’t file taxes?
The IRS finds out that people haven’t filed by comparing documents they have received from other parties. For instance, if your employer issues a W2, your bank generates a 1099-INT, or another entity creates another payee form with your details, the IRS will receive these forms. If the agency doesn’t also receive a tax return from you, they may send you a demand to file.
How far back can the IRS go if you don’t file?
When a return isn’t filed, the IRS can go back any period of time. There is no statute of limitations on unfiled tax returns.
However, in practice, the IRS usually only goes back three to six years. That means if you have several years of unfiled returns, you really only have to worry about tax bills from the last few years showing up.
Can I go to jail if I haven’t filed taxes in years?
Only if you are found guilty of tax evasion or criminal tax fraud. Not filing a tax return is generally considered a civil issue, but if the IRS believes that you have willfully not filed in an attempt to evade paying taxes, the agency may recommend a criminal investigation against you, and that could lead to jail time.
Should I file if I can’t pay?
Generally, yes, you should file a tax return even if you can’t pay. The penalties for not filing are 10 times higher than the penalties for paying late, and by filing on time or as close to the deadline as possible, you minimize the late filing penalties.
Additionally, if you have refunds from some years, those funds can help to cover the tax due from other years. And if you file for a refund but you have unfiled returns from previous years, the IRS may hold your refund in case you owe for those years.
Finally, if you want to set up a payment plan on back taxes or apply for a settlement, you will need to file your back taxes before the IRS approves either of those options.
What are the penalties for not filing taxes?
The financial penalties include a failure to file penalty that can be up to 25% of your balance. There’s also a late payment fee that can get up to this amount as well. As indicated above, you’ll also face other financial consequences like difficulty getting loans. In rare cases, the IRS may assess criminal tax evasion charges against you which can include jail time.
Get Help With Unfiled Returns
Tired of worrying about what’s going to happen if you don’t file? Have you already received letters from the IRS telling you to file? Dealing with a substitute for return or a tax assessment? Regardless of where you are in the process, we can help you get out of this mess.
At Damien’s Law, we provide customized services to all of our clients. When you contact us, we’ll talk with you about your tax situation. Then, we’ll help you figure out the most efficient way to catch up on your unfiled returns, and finally, we’ll help you make payment arrangements with the IRS. We can also help you deal with unfiled state returns. To learn more, contact us for help today.
