What Happens If You Have Unfiled Tax Returns?

Maybe you didn't realize you needed to file a return. Maybe you did and just forgot, and now you're out of time. You've just received a letter from the IRS informing you that you've failed to pay your taxes for the last year, and now they're coming after you. However you ended up in this situation, there's no point trying to hide from it. However, all is not lost! Read on to find out how you can resolve your unfiled tax returns and quickly get your taxes back on track.

What Happens If You Have Unfiled Tax Returns?

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Consequences of Filing Late

If you end up with unfiled taxes, there are a number of measures that the IRS may apply to you. These can range from a simple penalty charge to court cases that may result in a criminal record.


Monetary Penalties

After midnight on April 15, the yearly deadline by which you are required to file your taxes, late penalties will come into effect. For every month you continue to not pay your taxes from here on, you'll owe an additional 5% in penalties, up to a maximum of 25%.


If you have an unpaid tax debt, but still file your taxes by April 15, then you'll have a lesser penalty applied, usually between 0.5% and 1% of the debt for every month it goes unpaid. It is possible in some cases to apply for an extension to the April 15 deadline, but you'll need to go through the proper channels and fill in the correct paperwork well in advance.


You May Lose Your Tax Refund

The IRS allows a maximum of three years to claim refunds of back taxes, but after the deadline expires at the end of the third year, you will have forfeited the refund permanently, which means you're likely to lose out on cash that you most likely need.


Even if you do try to claim it, the refund will most likely be delayed if you have consistently filed deadlines late, as the IRS will thoroughly investigate your claim, and penalties will be levied before the refund is issued, possibly causing you to lose the entire refund, depending on what is owed.


You Could Face Jail Time

The IRS will continue to send you letters for as long as you continue not paying your taxes, and the longer you ignore them, the steeper the fines can get. You could end up owing as much as $25,000 if you consistently fail to pay.


If you still don't face up to the problem, by this point you could be facing jail time as the IRS may start to build a criminal case against you. That being said, in most cases the IRS won't bother trying to indict you unless you've willfully committed a serious offense, such as running an undeclared side business, but you're still running the risk of acquiring a criminal record as a convicted felon.


What Can I Do to Avoid These Penalties?

The first step is to face the problem head-on and contact the IRS. You'll need to ask them what they're doing with your account, and whether they've begun an investigation. It's also a good idea to ask them who's dealing with your account. If it's been referred to the local revenue officer, then you can expect a visit in person and some very uncomfortable conversations. If it's been sent to a service center, then you're only likely to receive notices, for the time being.


The IRS will sometimes file a substitute return for you, called an SRF, based on information that they already hold on you. This can include W-2 and 1099 forms. If you find they've done this, they will usually allow you an additional 21 days to file your returns. Either way, you'll get a letter stating the sources of income they used to calculate your substitute returns, and you'll then be given 30 days from the date on the letter to send three important documents to the IRS.


You will need to:

  • Send in a completed tax return
  • Enclose a letter consenting to the assessment and collection form you will have received
  • Write a letter explaining why you've failed to file your taxes


Filing for Previous Years

When you're in the process of rectifying your unfiled tax returns, it's a common mistake to file further back than you need to. However, many people don't realize that to return to good standing with them, the IRS only normally requires that you file up to six years of taxes. However, this is only a general rule. Managers at the IRS may require that you file returns going back further, depending on several factors, including having a history of non-compliance and the degree to which you've broken the regulations.


You're more likely to be asked to be required to file going back further than 6 years if a local Revenue Officer has been assigned to your case, but you can always query why you've been asked to. It's worth quoting the relevant document dealing with late returns; it's called Policy Statement 5-133, Delinquent Returns—Enforcement of Filing Requirements.


Monitoring The Processing of Your Returns

You must remain in close contact with the IRS during the process of rectifying your tax situation. In particular, be sure to get hold of your account transcript, which will prove that the IRS received your returns and that you have complied with the government in all the ways you are required to.


Going forward, make sure you send your future returns to the correct department of the IRS, especially if you were issued with the aforementioned SFR notice. If this is the case, then you'll be required to send your returns to the IRS SFR unit, as they will be flagged as the subject of prior enforcement. Your returns will be under extra scrutiny from now on, so it pays to be certain everything on your form matches the IRS records, and that nothing has been left out.

IRS Reasonable Cause Amnesty

In some situations, you may be lucky enough to qualify for what is referred to as IRS Amnesty, or Reasonable Cause. Whether you'll be able to avail of this is highly dependent on the situation, but your chances will be improved if you co-operate with the investigation from the start. Reasonable Cause usually refers to serious circumstances beyond your control that have prevented you from filing your taxes on time.


To qualify, you need to show that you have taken “reasonable care and prudence” to file your taxes but were unable to due to circumstances such as fire, death, serious illness, or an inability to obtain the relevant records. While it's rare if you qualify you can expect to have the penalties discussed above reduced, or in some cases even removed altogether.


The IRS will always investigate unfiled taxes, no matter the cause, so be sure you've filed on time! However, if something has gone wrong, and the IRS has sent you a letter, then don't worry. Simply visit us here at Tax Alliance today and let us resolve your situation quickly and professionally.

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