Guide to Resolving Unfiled Tax Returns

Unfiled tax returns can be a significant source of stress and financial strain for individuals and businesses. Ignoring your tax filing obligations can lead to escalating penalties, interest, and even potential legal action by the Internal Revenue Service (“IRS”) and state taxing authorities. It is imperative to address unfiled tax return issues promptly and with the correct professional guidance and strategy.

Unfiled tax returns can be a symptom of broader financial management issues for an individual taxpayer or business. For some, the process of gathering the necessary documentation is overwhelming, leading to procrastination and eventual non-compliance.

Some people may not fully understand their tax responsibilities. This is especially true for those who have just started a business or who have had big changes in their financial situation.

It is important to deal with the reasons why tax returns are not filed. This helps stop the problem from happening again, in addition to handling the returns that are overdue.

Consequences of Unfiled Tax Returns

The IRS imposes several penalties for unfiled tax returns. The failure-to-file penalty is typically 5% of the unpaid taxes for each month or part of a month that a tax return is late, up to a maximum of 25% of the unpaid taxes. Additionally, interest accrues on unpaid taxes from the due date of the return until the tax is paid in full. These financial penalties can quickly add up, creating a burdensome debt that can put financial strain on individuals and businesses.

To understand the magnitude and the necessity for filing timely, an IRS report showed that they assessed more than $25.6 bil­lion in additional taxes for returns not filed timely and collected almost $2.8 billion with delinquent returns!

Aside from penalties and interest, unfiled returns can complicate future financial dealings, such as applying for loans or mortgages, where proof of income is required. A common issue occurs when students try to get financial aid, but parents have unfiled tax returns. If a parent has not filed the requested tax return, the student will not be able to get financial aid.

The IRS may also file a substitute for return (“SFR”) on your behalf, which often does not account for deductions and credits you may be entitled to, resulting in a higher tax liability. This can lead to an inflated tax bill that doesn’t accurately reflect what happened in the unfiled tax year(s), creating problems with managing the tax debt and ensuing collection activity. The IRS has an array of notices to be on the lookout for that notify you to file your unfiled tax returns.

The IRS is also getting very aggressive against non-filers. In February 2024, the IRS started a new effort to reach high-income individuals who have not filed their tax returns. This effort, funded by the Inflation Reduction Act, involves sending compliance letters to individuals with significant financial activity—over 25,000 recipients reported incomes exceeding $1 million, and more than 100,000 had incomes between $400,000 and $1 million during tax years 2017 to 2021. This is a strong signal for all taxpayers to get into compliance.

And lastly, in very extreme cases, noncompliance can lead to criminal charges, fines, and even imprisonment. See Internal Revenue Code Section 7203.

IRS Statute of Limitations on Unfiled Tax Returns

Typically, the IRS has three years from the date a return is filed to assess any additional taxes. If you omit more than 25% of your gross income on a return, the IRS can audit you for up to six years. However, for unfiled returns, this does not apply until the return is filed.

In essence, there is no time limit for the IRS to pursue unfiled tax returns. This indefinite period means that the IRS can come after you at any time for taxes owed on unfiled returns, adding great uncertainty to your financial security.

The key takeaway is that filing your tax returns, even late, starts the clock on the statute of limitations and can limit your exposure to future audits or assessments.

Additionally, filing your tax returns begins the period during which you can make changes. This is important if you want to claim more deductions or fix any mistakes.

Steps to Resolve Unfiled Tax Returns

Taking decisive action to resolve unfiled tax returns is crucial. Here is a step-by-step guide to assist you through the process:

Step 1: Gather Necessary Documentation

Begin by collecting all relevant financial documents for the years in question. This includes W-2s, 1099s, receipts to prove business deductions or medical expenses, and any other pertinent records. This step may also require reaching out to banks or other financial institutions for past statements or previous employers to obtain W-2’s, so start early to avoid delays. Be sure to find all previous tax returns filed for reference.

If you’re missing documentation, the IRS offers a transcript request service to retrieve income and tax information. Be sure to request wage and income transcripts and account transcripts for the unfiled years and for any years with a balance due.

Organize all documents by year and type, using a system that makes it easy to reference them during the filing process.

Think about using digital tools or software to scan and save these documents safely. This way, your tax preparer can access them if needed.

Step 2: Prepare and File the Returns

Once your documentation is in order, the next step is to prepare your tax returns. For simple returns, prepare using tax preparation software or by hiring a tax professional.

If your tax situation is more complex, involving multiple sources of income, significant deductions, foreign income/assets, or if you own a business, hiring a tax attorney can be invaluable. We can provide insights into tax strategies that you might not be aware of and ensure that your returns are prepared in compliance with all relevant tax laws. This experience can result in a more favorable tax outcome and reduce the risk of errors that could lead to further IRS troubles.

Step 3: Submit the Returns to the IRS

The quickest route is to always e-file your prepared tax returns. The IRS will accept via e-file, the current year and 2 previous years of returns. For older tax returns, you will have to paper file to the appropriate IRS address.

If you owe taxes, you should look into making payment in full or a partial payment to avoid penalties and interest. You should also consider setting up an installment agreement to make monthly payments for the remaining amount due. The IRS offers several payment options. Be sure that all required tax returns are filed or these options will be unavailable.

At this time, you should also assess and plan for penalty relief. You may qualify for penalty relief if you can demonstrate reasonable cause for failing to file on time. Common reasons include medical emergencies and natural disasters. First time penalty relief may be available as well, for failure to pay and failure to file penalties only.

It is important to keep copies of your filed returns and any correspondence with the IRS for your records. This documentation can be crucial if any questions or issues arise later. Additionally, using certified mail or electronic filing methods can provide proof of submission, adding an extra layer of security and peace of mind.

Step 4: Monitor IRS Correspondence

After filing, stay vigilant for any communication from the IRS. They may send notices or request additional information. Respond promptly to avoid further complications. Ignoring IRS notices can lead to escalated enforcement actions, such as liens or levies, something you want to avoid.

Understanding the nature of any communication from the IRS is essential. Not all notices are negative; some may simply be informational or confirm receipt of your returns. However, if you receive a notice indicating an issue, it is crucial to address it immediately, either by providing the requested information or consulting with a tax attorney to determine the best course of action.

Case Scenario: Resolving Five Years of Unfiled Tax Returns

John, a self-employed financial consultant, has not filed tax returns for five years due to family issues and the care of his sick child. During this period, John earned significant income, and the IRS eventually sent notices warning him to file and that if he did not, an SFR may be filed and enforcement action would ensue. Scared for himself and his family, John reached out to a tax attorney for help.

Step 1: Document Gathering. John’s attorney helped him obtain wage and income transcripts from the IRS to identify what income had been reported. They also worked with John to gather and analyze bank statements and expense receipts to maximize allowable deductions.

Step 2: Filing Missing Returns. The attorney prepared and filed all five years of missing returns. Some could be e-filed, some paper filed and some could be filed over the phone with the IRS to be forwarded for processing.

Step 3: Follow up. The tax attorney followed up with the IRS and state by checking account transcripts to see if the returns were processed. Since too much time passed for tax return processing on the paper filed tax returns, the attorney called IRS account management to check on them to ensure proper processing and receipt.

Step 4: Addressing Back Taxes. John owed $50,000 in back taxes after all unfiled tax returns were processed. The attorney negotiated an installment agreement with the IRS, allowing John to pay the balance over 72 months. They also submitted a request for penalty abatement, citing John’s medical issues as reasonable cause for his noncompliance.

Additionally, they were able to get a first time penalty abatement for the failure to file penalty on the first offending year.

Seeking Professional Tax Return Help

For many individuals and business owners, the complexities of tax laws necessitate a tax professional. Engaging a certified public accountant (CPA) or an enrolled agent can provide invaluable expertise, especially for tax return preparation. Serious tax problems and multiple years of unfiled tax returns should be left to tax attorneys.

Benefits of a Tax Attorney for Unfiled Tax Returns

Tax attorneys have a strong understanding of tax laws and rules. This experience helps them file tax returns correctly and reduce tax costs.

• They stay current with changes in tax law, ensuring that your returns reflect the latest legal requirements and take advantage of all available benefits.
• They can expedite the filing process, allowing you to focus on running your business. By leveraging their experience and resources, they can streamline the preparation and filing process, often completing tasks more quickly and accurately than you could on your own.
• If you have any problems with the IRS, a tax attorney can represent you. They provide the benefit of attorney-client privilege, which helps reduce stress and ensures your situation is managed correctly.

Having this representation can be very helpful if the IRS audits your tax returns or if you have disputes about what you owe in taxes. Tax attorneys understand IRS rules well and can support you in these situations.

Unfiled tax returns can seem overwhelming, but the IRS provides definite resolution options. By understanding the IRS statute of limitations and seeking tax attorney tax return help when needed, you can resolve your tax issues effectively and get into compliance. Acting quickly not only reduces penalties and interest but also provides peace of mind knowing you’re in good standing with the IRS.

Take control of your tax situation today—delaying only makes the problem worse.

If you have one late return to file or multiple years’ worth, seeking professional help from Delia Law can simplify the process and reduce stress.