What Happens If You Have Not Filed Tax Returns for Several Years?

If you have not filed federal income tax returns for several years, waiting longer generally does not make the problem easier to resolve. The Internal Revenue Service can require delinquent returns, assess tax and penalties, prepare substitute returns based on information it has received from employers and financial institutions, and eventually begin collection activity when tax is assessed and remains unpaid.

Filing a tax return and paying the tax are two separate obligations. If you cannot pay the full amount you may owe, the IRS still instructs taxpayers to file their past-due returns. Filing the missing returns establishes what you actually owe and is usually the first step toward determining whether a payment plan, penalty relief, Offer in Compromise, or another resolution is available.

At Lana Kurilova Rich, PLLC, unfiled returns are one of the common federal tax problems we see. The process usually begins by determining which returns are missing, reconstructing the necessary financial information, preparing accurate returns, and then addressing any resulting federal tax debt.

How Far Back Will the IRS Require You to File?

There is no simple rule that every taxpayer with unfiled returns will be required to file exactly the same number of years.

Under current IRS administrative policy, enforcement of delinquent filing requirements will normally be pursued for a six-year period. That does not mean that six years is a statute of limitations on unfiled tax returns.

The IRS can consider circumstances such as:

• The taxpayer's history of noncompliance
• The amount of potential tax involved
• The government's ability to collect the tax
• Whether there are indications of fraud or willful noncompliance
• The amount of time and effort necessary to determine the tax
• Other facts specific to the taxpayer's situation

Depending on those circumstances, the IRS may require more or fewer than six years of returns.

This distinction is particularly important for someone who has not filed for a long period of time. It is usually a mistake to assume that returns older than six years can simply be ignored without first determining the taxpayer's actual filing requirements.

Does the Statute of Limitations Run If You Never Filed a Tax Return?

Generally, filing the return is what starts the normal federal limitation period for the IRS to assess additional income tax.

When a required return has never been filed, that normal assessment period generally does not begin simply because several years have passed.

An old unfiled year should not be treated as if it disappeared with time.

An IRS-prepared substitute return raises a different issue. If the IRS prepares a Substitute for Return, that IRS-created return generally does not start the normal assessment limitation period in the same way that the taxpayer's own filed return does.

A taxpayer who later files an accurate delinquent return can therefore put the actual income, deductions, credits, and filing position before the IRS rather than simply leaving the account based on the government's substitute calculation.

What Is an IRS Substitute for Return?

If a taxpayer does not voluntarily file a required return, the IRS can prepare what is called a Substitute for Return, often abbreviated as SFR.

The IRS generally builds the proposed tax calculation from information available to the government, including information returns submitted by third parties.

That may include items such as:

• W-2 wage information
• Forms 1099
• Interest income
• Dividend income
• Retirement distributions
• Other income reported to the IRS

The IRS may not have all of the information needed to reduce the taxpayer's taxable income or tax liability.

A substitute return may therefore fail to account for deductions, credits, business expenses, basis information, or other facts that could be available on a properly prepared return.

For that reason, an IRS substitute return should not automatically be assumed to represent the correct tax liability.

Can You Still File Your Own Return After the IRS Prepares a Substitute Return?

In many cases, yes.

The IRS itself advises taxpayers that even after a substitute return has been prepared, filing an accurate delinquent return may still allow the account to be adjusted based on the taxpayer's actual information.

That can be significant when the government's proposed assessment does not include legitimate deductions, credits, expenses, or other relevant tax information.

Timing becomes especially important if the IRS has already issued a Notice of Deficiency or another notice establishing a deadline to respond.

A taxpayer who has received an IRS notice concerning unfiled returns should therefore identify exactly what notice was issued, what tax years are involved, and what response deadline applies before deciding how to proceed.

What Penalties Apply to Unfiled Tax Returns?

For individual income tax returns and many business returns, the federal failure-to-file penalty is generally calculated as a percentage of unpaid tax for each month or partial month that the return remains late, up to the applicable statutory maximum.

A separate failure-to-pay penalty may apply when tax remains unpaid.

Interest can also continue to accrue on unpaid tax and certain penalties.

The amount ultimately owed therefore depends on more than the original tax balance. Depending on the facts, the account may include:

• Original tax
• Failure-to-file penalties
• Failure-to-pay penalties
• Other applicable penalties
• Accrued interest

The exact amount should be determined from the taxpayer's IRS account and properly prepared returns rather than estimated from the age of the problem alone.

Can Penalties for Late Tax Returns Be Reduced?

Sometimes.

The IRS provides penalty relief in circumstances where a taxpayer can establish reasonable cause and demonstrate that the failure occurred despite the exercise of ordinary business care and prudence.

The circumstances are evaluated individually.

Possible reasonable-cause factors include:

• Serious illness
• Death or unavoidable absence
• Fire or natural disaster
• Inability to obtain necessary records
• Other circumstances outside the taxpayer's control

Simply not having enough money to pay the tax generally does not, by itself, establish reasonable cause for failing to file a required return.

Penalty relief should be evaluated separately from preparing the missing returns and from arranging payment of the resulting tax debt.

What If You Cannot Pay the Taxes After Filing the Missing Returns?

Not being able to pay the entire tax balance does not mean that the returns should remain unfiled.

In fact, filing the required returns is usually necessary before many IRS collection alternatives can be considered.

After the missing returns are prepared and the tax liability is established, the available options may include, depending on the taxpayer's circumstances:

• Paying the balance in full
• An installment agreement
• An Offer in Compromise
• Currently Not Collectible treatment
• Penalty relief
• Challenging an incorrect assessment
• Other collection or administrative remedies

The appropriate strategy depends on income, expenses, assets, the amount and age of the tax debt, the tax periods involved, prior compliance, and whether the taxpayer is now current with filing and payment requirements.

An Offer in Compromise, for example, generally requires that the taxpayer first file all tax returns that he or she is legally required to file.

Can the IRS Levy a Bank Account or Garnish Wages Because of Unfiled Returns?

An unfiled return by itself is different from an assessed and unpaid tax debt.

However, if the IRS prepares a substitute return, assesses tax, sends the required notices, and the resulting liability remains unresolved, the matter can eventually move into the federal collection process.

Collection action can include:

• Federal tax liens
• Bank levies
• Wage levies
• Other collection measures authorized by federal law

By the time a taxpayer receives a final collection notice, the matter may require substantially more immediate attention than it would have when the missing returns first became delinquent.

What If You Are Missing the Records Needed to Prepare Old Returns?

Missing records are common when someone has gone several years without filing.

The first task is to determine what information still exists and what can reasonably be reconstructed.

Depending on the taxpayer and tax year, relevant records may include:

• Forms W-2
• Forms 1099
• Brokerage statements
• Bank records
• Mortgage documents
• Prior-year returns
• Business income and expense records
• Payroll records
• Retirement and investment records
• Records of estimated tax payments

IRS transcripts can also help identify wage and income information that third parties reported to the government.

However, an IRS wage and income transcript does not necessarily contain every document or every fact needed to prepare an accurate return. Business expenses, basis information, deductions, and other items may need to be reconstructed from the taxpayer's own records.

Preparing several years of delinquent returns can require both tax preparation and legal analysis.

Can You Still Claim a Refund From an Old Unfiled Tax Return?

Possibly, but the time to claim a refund is limited.

A person who failed to file may discover that withholding, estimated payments, or refundable credits resulted in an overpayment for a particular year.

In general, however, a taxpayer who is entitled to a refund must file within the applicable refund limitation period. For many federal income tax refunds, that means the return must be filed within three years of its due date to preserve the refund claim.

Waiting too long can therefore create an unusual result: a taxpayer may still be required to address delinquent filing obligations even though the opportunity to obtain a refund for an older year has expired.

The IRS can also hold a current refund when its records show that required prior returns have not been filed.

Does Filing Several Years of Returns at Once Create a Tax Debt?

Not necessarily.

The purpose of preparing the returns is to determine what actually happened during each tax year.

One year may have a balance due while another may show little or no tax. Another year may have originally generated a refund that can no longer be claimed because the refund deadline passed.

A substitute return may also show substantially more tax than a properly prepared delinquent return once legitimate deductions, credits, expenses, or basis information are considered.

The total tax problem should therefore be determined from the completed returns and IRS account records, not from assumptions about how much a person "probably owes."

Can Unfiled Tax Returns Lead to Criminal Charges?

Most delinquent filing matters are addressed through the civil tax system, but repeated or willful failure to file can create more serious consequences.

The IRS states that taxpayers who repeatedly fail to file may be subject to additional enforcement, which can include criminal prosecution.

That does not mean that every person who is several years behind on filing faces a criminal case.

The distinction between ordinary delinquency and possible criminal exposure depends heavily on the facts, including intent, the taxpayer's conduct, the amount of income involved, prior IRS contacts, and whether there are indications of concealment or fraud.

Someone concerned that the failure to file may be viewed as intentional should obtain legal advice before making representations to the IRS.

What Should You Do First If You Have Several Years of Unfiled Returns?

The first step is to determine the filing problem accurately, not to negotiate a payment plan.

That generally means:

1. Identify every missing return.

Determine which federal individual, business, payroll, or information returns were required but were not filed.

1. Review the IRS account.

Determine whether the IRS has already assessed tax, prepared substitute returns, issued notices, or begun collection.

1. Gather and reconstruct the records.

Obtain available income documents, IRS transcripts, business records, banking information, and other supporting documentation.

1. Prepare accurate delinquent returns.

The returns should reflect the taxpayer's actual income, allowable deductions, credits, expenses, basis, and other relevant information.

1. Determine the real liability.

Only after the returns are prepared can the taxpayer accurately evaluate tax, penalties, interest, refunds, and existing IRS assessments.

1. Address the resulting tax debt.

If tax remains due, determine which payment, settlement, penalty-relief, appeal, or collection alternative is appropriate.

1. Remain current going forward.

Ongoing filing and payment compliance can be important to obtaining and maintaining a resolution with the IRS.

Several Years of Unfiled Returns Can Usually Be Addressed More Effectively Once the Facts Are Known

The number of missing years alone does not determine the outcome.

A taxpayer may have a mixture of balance-due years, substitute IRS assessments, missing records, possible refunds, penalties, and collection notices. The correct approach depends on what was required for each year and what the IRS has already done.

Lana Kurilova Rich, PLLC combines federal tax representation with in-house tax preparation and accounting support. This allows the firm to address both sides of an unfiled-return matter: preparing or reconstructing the missing tax returns and addressing the legal and collection issues that may follow.

The firm is based in Bellevue, Washington, and represents individuals and businesses in federal IRS matters throughout the United States.

If you have not filed federal tax returns for several years, the first objective is to determine the filing requirements and actual tax liability before deciding how to resolve the account.