If you have unfiled tax returns, you’re not alone. Every year, millions of taxpayers fall behind on filing taxes for a multitude of reasons. There may be life changes, business struggles, fear of owing more than they can pay, or simply being overwhelmed. The truth is that unfiled tax returns are one of the biggest barriers to resolving IRS tax debt.
Whether you’re a business owner, self-employed gig worker, or wage earner who stopped filing during tough times, getting back into compliance is the first and most critical step in resolving your tax problems. Let’s walk through what happens when you don’t file, why filing matters, and how unfiled returns impact your ability to settle with the IRS.
What Happens When You Have Unfiled Tax Returns
When a tax return isn’t filed, the IRS doesn’t just forget about it. The IRS builds its own version of your income history through third-party filings like W-2s and 1099s. Once enough time passes, the IRS may prepare a Substitute for Return (SFR), which is a return they file for you. Immediately, you might think “Oh, well that saves me the trouble”. That’s not the truth. When the IRS files a SFR, they don’t include any deductions, expenses, or credits you may actually qualify to receive. This typically generates a tax bill that is almost always higher than what you actually owe! Penalties and interest start piling up on that incorrect tax bill.
Penalties and Interest
Besides the unpaid tax, the penalties and interest are what really cost you! Here’s a list of penalties that are related to late or unfiled tax returns:
- Failure to File Penalty: 5% of the unpaid tax per month, up to 25%.
- Failure to Pay Penalty: 0.5% per month, up to 25%.
- Interest: Compounded daily on both the tax and penalties. The interest rate is the Federal Short Term Rate + 3%. It is reviewed quarterly.
- Loss of refunds: If you wait too long to file your tax return, you just won’t get the refund.
- Enforcement Actions: Wage garnishments, levies, and federal tax liens may be issued.
These costs add up! Filing on time automatically saves you money by avoiding the Failure to File Penalty!
Do you have to file ALL the unfiled tax returns?
Taxpayers often ask if they have to file all of their missing returns. As with anything in tax, that depends.
The IRS technically has the right to demand returns for any year you didn’t file, in practice it usually requires the last six years. If you have SFRs for older years, it may be prudent to file the tax return to reduce the balance you owe. The IRS isn’t the only agency to consider though. Your state may also demand that you file all of your missing returns. Most states pull information from Federal returns. The states may force you to file returns outside of the 6 years required to be in compliance with the IRS.
You must file before you can pay
The mistake many taxpayers make is trying to get into a payment arrangement before the unfiled tax returns are filed. That is backwards and unproductive.
You can’t make a solid resolution plan until the IRS knows the true amount you owe. You can’t know that until the required returns are filed and processed. If you have unfiled tax returns, here’s what you need to do:
- Gather records
- Reconstruct your records
- Prepare and file accurate returns
Once the above is completed, the IRS will assess the tax and you can pursue resolution options. Unfiled tax returns impact every resolution option available to you. You must be in compliance and have all tax assessed before you can pursue any alternative payment option, regardless of whether it’s a payment plan, Offer in Compromise, or even requesting a penalty abatement.
Once you get into compliance with the IRS and establish a resolution plan, you must file your taxes on time for at least the next 5 years AND not incur any new tax, which may require you to make estimated tax payments. If you fail either of those two, the IRS will default your plan and you have to start all over again.
LuSundra Everett, EA is The Home Biz Tax Lady. She is a tax expert located in Chester, VA who will find the right solution for you! As an Enrolled Agent licensed through the Internal Revenue Service, LuSundra is authorized to represent taxpayers in all 50 states against the IRS and your state!
Through her work with ETS Tax Relief, she helps high income non-filers and small-business owners face the IRS with confidence, clarity, and a plan.
When you’re dealing with IRS letters, tax debt, or business tax issues, the right representation makes all the difference. At ETS Tax Relief, we work with individuals and business owners across Virginia to resolve tax problems, prevent future issues, and restore peace of mind.
If you’re ready to put your tax troubles behind you, visit http://www.etstaxrelief.com to learn more about how we can help.
