Unfiled Tax Returns? Back Taxes? IRS Penalties? What Do I Do Now?

Posted By Pedro Gonzalez, CPA on May 7, 2019 | 0 comments


We are all familiar with the annual tax filing ritual; around January, most people collect their tax documents to file their tax returns by the deadline. However, some people sometimes or always need an extension. All of the information is gathered after the tax deadline of April and filed before the extension deadline. There is another group of people, that don’t meet the extended deadline, and their tax return is late and unfiled. If you are in the third category this information is for you.

Then the next tax season rolls around, and you still haven’t filed last year’s return—so you don’t want to do the current one either, out of fear of the IRS or because you need last year’s data. The problem is piling up and fear is over-taking you. This problem sometimes can go for a couple of years before the IRS contacts you.

If you are in this situation, don’t let this problem take control of your life and your peace of mind. Here I will provide you with a road map on how to get out of this hole and regain your peace of mind.

One thing that must be made clear is that, if you have late, unfiled tax returns, you have an urgent problem that you should start to fix right now. If you choose to ignore this warning, here are some possible consequences:

  1. The IRS preparing and filing a return for you—and almost always overstating the tax you owe by a lot!
  2. Criminal prosecution.

While the IRS rarely criminally prosecutes people for not filing tax returns, this cannot be ignored since it can and does happen, especially in egregious cases and those of celebrities and public figures, such as Wesley Snipes.

The best way to avoid criminal prosecution is to come forward and voluntarily file any delinquent returns. The IRS has a time-honored policy that, in general, it will not criminally prosecute for failure-to-file those taxpayers who come forward and file their past-due tax returns.

How Far Back Do I Go?

This is a common question I get from those who are behind with the tax filing. If you have a long-standing problem, the IRS usually shows you some mercy. In general, the IRS requires you to file the most recent six years of tax returns to be in current compliance with your tax return filings.

However, the IRS could require you to file tax returns beyond the six-year period. But this is not common and requires approval from an IRS manager. Another consideration: the six-year policy is merely an IRS policy and not actual law.

Once you file a tax return, the general three-year statute of limitations on assessment of tax starts to run. If you never file a tax return, you give the IRS open season with no time limits to assess tax for that unfiled tax year.

In certain circumstances, you may find it advantageous to file a return beyond the IRS’s six-year requirement even if you aren’t required to.

Example. Paul Procrastinator didn’t file a tax return for tax year 2008. The IRS eventually decided to do a 2008 return for Paul that showed $20,000 in taxes due, plus thousands of dollars in interest and penalties. But if Paul had filed an original 2008 return, that return would have shown $4,000 in actual taxes due. By filing an original return, Paul would have saved $16,000 on his tax bill and reduced his penalties and interest by about 80 percent!

Are You Behind With Your Payroll Tax Returns? Read This!

If your business has unfiled payroll tax returns but made all of its required tax deposits, and the returns show no tax owed, go ahead and file those delinquent returns.

But if you made only some or none of the required tax deposits, and your payroll tax returns show that you owe the IRS money, you need to take special care before you file them. If you run your business as a limited liability company or corporation, you are not personally liable for the payroll tax balances; only your entity is.

Note: the IRS can potentially transfer liability for the “trust fund” portion of payroll taxes to you as the person responsible for allowing the business entity to fail to pay the IRS.

What are “trust fund” taxes?

They are the taxes that you collect on behalf of your employees and send to the IRS—namely, the employees’ federal income tax withholdings and their half of FICA taxes.

If you have unpaid trust fund taxes, it is in your best interest to pay off the trust fund portions first. To do this, you send a designated payment to cover the trust fund taxes. The IRS honors such designations. If you don’t designate the payment, the IRS applies the payment to the non-trust fund taxes first!

I filed, Now What?

Once you file those late returns, you’ll feel a big sense of relief that you’ve started on the path to getting this behind you. It’ll take several months for the IRS to process those returns. Here are a few things to keep in mind:

  1. The IRS will send you a notice for each tax return it processes. Check the notice to make sure it matches the return as you filed it. If it doesn’t, and if you don’t agree with the change, call the telephone number on the notice to speak to an IRS representative about it.
  2. If any of your late returns show a balance owed, the IRS will likely hit you with penalties and interest for one or more years. Look at the earliest year you just filed to see whether you can get “first-time abatement” for that one year.
  3. If, after the dust clears, you are going to owe money to the IRS for your individual tax returns, it is time to prepare a tax debt resolution plan. It may behoove to hire a tax professional to handle this tax matter in your behalf.
  4. If you are filing returns that are more than three years past their due dates, and the returns show refunds due you, you are likely filing after the statute of limitations for refunds.  If the statute of limitations has passed, the IRS removes any amount payable to you and puts your refund money in the U.S. Treasury, and you simply say good-bye to that money.

Final Thoughts

Unfiled tax returns make a very uncomfortable noose around your neck! Remove that noose and get past the problem by following the strategies in this article. If you need help, don’t procrastinate this problem won’t go away by ignoring it.

If you are in this situation, the best advice I can give you is to come forward and voluntarily file your returns right now. You likely want the help of a tax professional who knows the rules of the road. As you learned above, doing this right makes this process less expensive and less painful.

Keep the special six-back-years rule in mind if you have unfiled returns for more than six years. It’s likely that you can qualify for the IRS six-year favorable treatment, assuming that you are filing voluntarily and filing before the IRS has caught up with you. Also, if you have back payroll taxes and/or returns, get those cleaned up now. If you can’t pay the full amount due, make sure that you designate your payment to apply to the trust fund portion first.

Here’s the real deal on all these problems: If you voluntarily take care of the tax problem, you save money and heartache. If you wait for the IRS to come to you with the problem, you lose money and suffer heartache. The choice is yours!

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