Unfiled Tax Returns

Falling behind on tax returns is common, and it usually has a reason: a move, an illness, a job loss, a business that outgrew its paperwork, or fear about what you might owe. The IRS advice is simple. File every return that is due, even if you cannot pay in full. Filing limits penalties, opens the door to payment options, and may bring a refund.

Why filing matters even if you cannot pay

Two separate penalties can apply. The failure-to-file penalty is usually 5% of the unpaid tax for each month or part of a month the return is late, up to 25%. The failure-to-pay penalty is generally one-half of one percent per month, up to 25%. Filing on time without paying therefore costs far less than not filing. See the failure-to-file penalty and failure-to-pay penalty pages. Interest also runs on unpaid tax.

If you are owed a refund, there is generally no failure-to-file penalty, but the refund is at risk because of a deadline; see below and filing late when you are owed a refund.

How far back do you need to file?

The IRS manual says the usual enforcement period for non-filers is not more than six years, although management can approve a longer or shorter period based on the facts. That is an internal guideline, not a legal limit. Absent signs of fraud, examiners are told to advise taxpayers to file all delinquent returns without regard to the number of years involved. There is also no time limit on assessing tax for a year in which no valid return was filed; see statute of limitations. Each missing year deserves a decision made with complete information.

What happens if you do not file

The IRS may prepare a substitute for return (SFR) using the income reports it has, such as Forms W-2 and 1099. The IRS manual states that deductions and credits are not allowed on an SFR other than the standard deduction for individuals, so the tax can be much higher than what you would owe on a return you prepare. An SFR does not start the three-year assessment period; filing your own return afterward does. Before an SFR-based assessment becomes final, the IRS sends a notice of deficiency, CP3219N, that gives you 90 days to file a return or petition the Tax Court. The IRS says you cannot request an extension to file after a CP3219N arrives. Filing your own return is usually worth doing, because it can claim deductions and credits you are entitled to.

The refund deadline

To claim a refund of withholding or estimated tax, you must file within 3 years of the return's due date. The same time limit applies to credits such as the earned income credit. After that, the refund is gone, and it cannot be applied to another year. The IRS also holds refunds while required returns are still past due.

Step by step

1. List the missing years. Check your IRS online account or request an account transcript and a "verification of non-filing" letter. See tax transcripts.
2. Get your income records. The IRS says a wage and income transcript, requested through your online account or with Form 4506-T, shows the Forms W-2 and 1099 reported for you. Contact employers and payers for missing forms.
3. Reconstruct what is missing. Use bank statements, deposits, invoices and receipts. Self-employed people and landlords often have more records to reconstruct.
4. Prepare each year on the forms for that year. Tax rules, forms and amounts change each year.
5. File. Send each return to the same location, and in the same way, as an on-time return. If you received a notice, send the return to the address on the notice.
6. Deal with the balance. The IRS says you can ask for an additional 60 to 120 days to pay, with no user fee, through the Online Payment Agreement application. You can also request an installment agreement or see whether you may qualify for an offer in compromise.
7. Stay current. Once caught up, file on time, make estimated payments if you are self-employed, and keep copies of everything.

Penalty relief. Penalty relief may be possible for reasonable cause, or through first-time abatement, which requires that all currently required returns be filed or covered by an extension. See first-time penalty abatement.

Common mistakes

• Waiting until the amount owed is affordable before filing.
• Filing with estimated numbers instead of reconstructing the records.
• Overlooking foreign account reporting for those years; see FBAR and Indian bank accounts.

How we can help

We can pull your IRS records, work out which years are missing, reconstruct income and expenses, prepare and file the late returns, and set up a payment arrangement or penalty abatement request. If the IRS has already sent notices, we can respond for you once you sign a power of attorney. We will explain what we find without judgment. Results depend on the facts, and we cannot promise a refund or penalty relief.

See our individual tax preparation services or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.