Unfiled IRS Tax Returns

March 6, 2018

How to Handle Unfiled Tax Returns (Without Losing Everything)

Every year Americans gather together their W-2s and other tax forms and file their yearly taxes. Then, anywhere from 3 to 6 weeks later they usually receive some sort of tax return.

For some people, this is a time to pay off debt and to have a little bit of extra money that they weren’t counting on. For others, this is a terrifying time when they wait for their bank accounts to be levied and constantly watch for an IRS tow truck.

Not filing your taxes can have disastrous financial results. The IRS is one government agency that’s known for its ruthlessness and limitless collection procedures. They can reach into your bank account and take everything that you own with very little forewarning.

Dealing with unfiled taxes can be extremely stressful and drive many people into a total panic. Unpaid taxes can build up quickly, and penalties can cause a manageable amount to grow exponentially in a very short time.

Seeking out the help of a tax professional or doing some research can help you choose the right path to take care of your unfiled tax returns.

How Far Back Can They Go?

The IRS generally looks back over a period of six years. Anything within the six years can be a red flag and end up creating penalties and late fees. It’s very important to make sure that you understand your filing status each and every year that you pay taxes.

The agency may be a bit more understanding if you pay taxes through your employer each year. The bigger problems come into play when you are self-employed or are required to have a 1099. Being an independent contractor makes you responsible for paying your own taxes every year.

Failing to do this can land you in a huge amount of debt. If your taxes are removed from your paycheck automatically then you may be entitled to a refund. The IRS can assign penalties that can eat into any potential refund if you don’t file your taxes as soon as you realize that they weren’t done.

Trying to avoid paying taxes by not filing each year is a horrible idea, and one can land you in jail. Tax evasion is very different than simply forgetting to file, but purposefully refusing to file can land you in hot water with the IRS.

Before filing your taxes every year, make sure to look back through the previous year’s tax returns and to make sure that everything was done correctly. This can eliminate any potential problems and allow you to catch others before they snowball into larger ones.

Evaluate your tax situation

By evaluating your tax situation, you can identify areas where you may be able to reduce your tax burden and make informed decisions about your financial future.

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What do You Need to Get Started?

Once you realize that you have unfiled tax returns, the first thing you need to do is gather as much information as possible. The IRS may go back longer than the six years if you owe money to them, or they determine that you willfully refused to file your taxes.

They also have the option of filing a return for you. This is something that you definitely don’t want to happen. They often do this based on estimates or numbers claimed by your employers, and they leave out any additional exemptions that you would qualify for.

This can quickly turn a refund into an amount that you owe. When the IRS does this, it’s referred to as a substitute for return. Some taxpayers don’t realize that this has happened until they’re receiving a bill or a tax lien from the IRS. This is why it’s so important to continually go back over your old filings and to make sure that things are accurate.

If you do discover that the IRS has filed a return on your behalf, you have the option of amending this. It’s best to do this with your local taxpayer advocate, or to seek out an actual office.

The IRS will almost always send you notice before they take any action like this. If they don’t have your updated address, or if the letter gets overlooked, you can end up in serious trouble without even knowing it.

Get started by determining exactly what year you need to file for. Then, gather any and all paperwork relevant to that time. This can be everything from W-2s, pay stubs, receipts, to 1099 forms. It’s also good idea to pull your bank statements and any billing statements that might be used as deductions.

It can be difficult to get all this information together, and the IRS can substitute for some of it. They do this by going back over employer records, or by looking at what you’ve spent. The more information you have the better off you’ll be when it comes time to file.

Disclosing Everything

One of the best things you can do when dealing with the IRS is to be completely honest. This level of transparency allows them to see that you’re serious about making a mistake, and that you’re willing to take responsibility for it.

If you try to hold something back that is required to file the returns, they can end up being rejected and prolonging the period for penalties and other adverse action. Remember that the IRS has an arsenal of different tactics available to them.

This is a government agency that doesn’t have as many regulations as a standard debt collector. They have the ability to backtrack all of your spending and figure out exactly where your money is. They can seize your bank account, your vehicle, your home, and any other assets that you may have.

Many people choose to work with a professional when dealing with the IRS because of these reasons. Not every taxpayer is aware of their legal rights, and it’s very important that you be honest without allowing the IRS to take advantage of you.

Records for Self-Employed Individuals

Whether you own your own business or simply work as an independent contractor, you might receive 1099 forms or be required to report additional income. A 1099 is a form that can be applied to income paid by a third party, or any number of retirement accounts or insurance policies of cash value.

There are also instances when people are paid entirely in cash, and there isn’t necessarily a strong paper trail. It may seem tempting to leave this income out of your filing but doing so can have disastrous results.

The person that paid you might need to report this as an exemption or your spending might draw attention. This can lead the IRS to question and perform an audit looking into everything from your bank statements to your assets versus income.

If it is discovered that you withheld your tax information from the IRS, they can come in and take what they believe to be the amount owed.

When filing past returns for a self-employed individual, you’re going to want every bill and statement relative to the business. This can be your utility bills for your home, or the square footage of your home office.

Most companies will allow you to go in and print off an itemized list of bills that you paid over the past two years. It may be necessary to stop by utility offices, or to call your bank to get additional statements. These can be extremely helpful when itemizing deductions.

Negotiating Solutions

After the missing returns are filed, the IRS may determine that you owe back taxes. If the number is small enough, make every effort to pay them as quickly as possible. If it’s too large to manage in a single payment, consider setting up an installment agreement or applying for an offer and compromise.

An installment agreement usually allows you to make a monthly payment for a period of up to six years in order to pay back the amount owed. Unfortunately, the IRS can continue to charge penalties and late fees as the payments are made. This compounds the amount and ultimately ends up costing more than it’s worth sometimes

The Offer and Compromise is a more popular solution. This allows you to give a complete accounting of every asset and every source of income in order to come up with an amount that the IRS believes manageable for you. They will take this amount in either a lump sum or over a period of a few months.

There are times when this can be less than 1% of the total owed. Once the amount is paid off, the IRS will completely discharge the debt. They may continue to take any tax refunds for a certain number of years, but the threat of liens or frozen bank accounts will be gone.

Avoiding this in the Future

The only way to avoid future issues with the IRS is to be vigilant when filing taxes and double-checking the status of each preceding year. Working with professional can provide you with the best possible chance of getting things right the first time. They can also offer insurance or advice on how to deal with problems if they should arise.

The more professionals you have on your team, the better off you’ll be if you find yourself dealing with a scary situation involving the IRS.


Clinton F Wassor

Clinton F. Wasser, holding a Master of Science in Legal Studies of Taxation, brings a wealth of expertise in tax planning and compliance to his writing. With a career rooted in the workings of the tax landscape, Clinton navigates difficulties with finesse. Beyond his professional accomplishments, he generously volunteers his time to educate high school students about the nuances of taxes. As an author, Clinton marries his real-world experience with a passion for simplifying tax concepts. He has found that his technique empowers readers to better understand the world of taxation.
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