Having unfiled tax returns can feel very stressful. 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.
Consequences of Not Filing Your Tax Returns
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:
Penalties for Not Filing
The IRS will add penalties if you don’t file. The failure to file penalty is 5% of the unreported tax liability, and assessed monthly, and this fee can get up to 25% of your balance. 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 stack on top of each other.
Loss of Tax Refunds
If you’re eligible for a tax refund, you only have three years to claim it. You must file your return within three years of the original due date to get a refund. This rule also applies if you want to amend an old tax return to get a refund.
Tax Assessment
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.
Involuntary Collections
When you don’t pay your tax bill, 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.
Personal Financial Challenges
Beyond any actions that the IRS takes, you may suffer consequences to your personal finances. 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 Unfiled Tax Returns
Feeling behind on your tax returns can feel very hopeless. After all, it’s hard enough to complete tax returns one at a time, so doing multiple at the same time feels understandably overwhelming. A tax professional can help you get caught up. They’ll guide you through the following:
- 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.
- Gather tax documents — You can get copies of wage and income documents by setting up an online tax account with the IRS or by contacting the people who paid you.
- 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.
- 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.
- 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.
- Pay in full or make payment arrangements — Finally, all that’s left is paying the bill, and while this sounds stressful, the IRS has a lot of options to help you out.
If you file a standalone business return, such as 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 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.
- Offer in compromise — Pay a lump sum or 24-monthly payments to settle your tax debt.
- 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 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 five or six years. Even if you haven’t filed for decades, the IRS usually lets you catch up by getting compliant with the last five or six years.
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 and special incentives like the stimulus payments during COVID. 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. 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.
What are the penalties for not filing taxes?
The financial penalties include a failure to file fee 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.
