If you haven’t filed taxes in 10 years, you are at risk of the IRS coming after you, assessing tax against you, and potentially even pursuing legal charges if you have not filed in an attempt to evade taxes. Here’s the good news – in most cases, you only need to file the last six years of returns to get back into compliance.
Most taxpayers simply need to file their old returns as usual. Taxpayers, who willfully didn’t file to evade taxes, however, may need to get back into compliance through the IRS Criminal Investigation Voluntary Compliance Procedures. To find the best option for your situation, contact us at Seattle Legal Services today.
Key takeaways
- Six-year compliance rule – If you have 10 years of unfiled returns, you usually only need to file the last six years.
- High-income exception – If you have a high income, you may need to file all 10 years of returns.
- Tax fraud – The IRS may require more years if they suspect tax fraud.
- Criminal failure to file – If you have intentionally not filed to evade tax, you may need to file through the Voluntary Disclosure Practice.
- Tips for success – Work with a tax attorney to get back into compliance, minimize penalties, and set up payments.
Do You Really Need to File All 10 Years?
If you’re 10 or more years behind, the IRS will typically only require you to file the last six years of returns. Talk with a tax attorney to find out what you should do in your situation. If you file the last six years of returns and the IRS wants additional years, the agency will contact you.
When you may need to file more than six years of returns
The six-year compliance rule is not a tax law. Rather, it’s an administrative guideline. That means when reviewing delinquent tax return submissions, IRS employees may require more returns if you are a high-income filer (ie, there is a lot of tax to collect from the unfiled returns) or if there is an indication of fraud.
The agency will also require you to file more than six years of returns if you have withheld or collected tax related to the unfiled returns. For instance, if you withheld taxes from employee pay but didn’t file the payroll returns, you will need to file all of them.
When you may only need to file a few years of returns.
In other cases, you may not even need to file all six years of returns. If you were not required to file a return for that year, you don’t need to file. However, there are often compelling reasons to file past returns even if you’re not required. Consider the following
- Are you due a refund for the return? You only have three years to claim a refund, but if you’re still in that time frame, you should file the returns as the refund can help to offset any tax you owe from other years.
- Did you experience a business loss? You can roll forward net operating losses to future tax years, helping to reduce the total amount owed.
- Do you want credit for paying self-employment taxes? If you’re self-employed, you only get credit for making Social Security and Medicare contributions if you file a tax return, showing those payments.
Consequences of Not Filing Tax Returns
Not filing required tax returns can lead to the following issues:
- Loss of tax refunds – you only have three years from the due date to claim a tax refund.
- Refund offsets – If you file a return with a tax refund but you haven’t filed in previous years, the IRS will keep the tax refund to offset any potential taxes you may owe from your unfiled returns.
- Substitute for return – if you don’t file, the IRS may issue a substitute for return to assess tax against you.
Once the IRS assesses tax against you, the agency can move forward with collection actions. They may seize wages, bank accounts, investment accounts, and physical assets. They can even take away your passport if you owe over a certain threshold.
How far back can the IRS go with unfiled returns?
There is no limit to how far the IRS can back back for unfiled returns – there is no statute of limitations on this. However, once the tax is assessed (either because you filed the return or the IRS assessed tax against you), the IRS only has 10 years to collect.
Are there criminal consequences for unfiled returns?
Not filing a tax return can be a misdemeanor if you didn’t file in a willful attempt to commit tax evasion, and it can rise to the level of felony tax evasion if certain conditions are met. Note the word “wilful” – accidents and oversights generally don’t qualify as wilful behavior.
How to Catch Up on Unfiled Returns
Here’s what you should do if you haven’t filed taxes in years.
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Determine if you need to use the Voluntary Disclosure Practice (VDP)
If you have purposefully avoided filing to evade paying taxes, you may be able to use this program. The VDP can help you get back into compliance while reducing the risk of legal consequences.
However, you should not use this program if you did not commit a crime – the IRS advises all taxpayers to consult with a tax attorney before filing returns through the VDP. When you apply to the VDP, the IRS will let you know how many years you need to file.
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Decide which years you need to file.
Most taxpayers do not need to use the VDP. Instead, they just need to file their old returns. The first step is figuring out which years you need to file. A tax attorney can help you figure this out, but in the meantime, consider the following:
- Was your income over the filing threshold for the year?
- If not, do you trigger one of the other filing requirements – for instance, you owe tax on unreported tips.
- If you’re not required to file, are you due a refund for the year and do you still have time to claim it?
If you answer yes to any of the above questions, you should file for that year.
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Check if the IRS has filed a substitute for return.
Use your online account to see if the IRS has filed a substitute for return for you – generally, you can just file a new return to take the place of that one. However, in some situations – for instance, if you’re likely to settle the full amount due – you don’t necessarily need to refile these returns.
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Get wage transcripts or recreate self-employment details.
To do your return, you need details about your wages and business income if relevant. The IRS keeps wage and income transcripts for the last 10 years available online. You can reconstruct business records using point-of-sale reports, bank account statements, receipts, invoices, and similar documents – you may need an accountant to help.
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Gather details about dependents and other deductions.
If claiming dependents on your returns, you need their Social Security Numbers and dates of birth. If you itemize, you also need details about state and local taxes, medical expenses, charitable donations, and other deductions.
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Make a plan to pay the back taxes.
Once you find out how much you owe, make a plan to pay it. If you’re filing through the Voluntary Disclosure Practice, you are generally obligated to pay everything after the IRS accepts your request to participate in the program.
In other cases, you may want to look into installment agreements (monthly payments), offer in compromise (settle for less than owed), or currently not collectible (pause on collection actions due to economic hardship).
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Request penalty abatement
Late-filed returns are subject to late filing and late payment penalties. Depending on how late the return is, these penalties may have maxed out at 50% of the balance – in other words, if you owed $10,000, the penalties will bring the balance to $15,000. To protect yourself, you should apply for penalty abatement.
Call the IRS, file Form 843, or contact a tax pro for help. You need to navigate this process carefully to ensure you get maximum benefit from your request.
Once you’ve resolved the unfiled taxes, make a plan to stay on track with future filing requirements. This is especially important if you set up a payment plan or an offer in compromise. If you don’t file or don’t pay, the IRS can put your payment plan into default or rescind your offer in compromise agreement.
FAQs
Do I need to file all 10 years?
Generally, you only need to file the last six years. However, you may need to file all 10 years if you have high income, committed tax fraud, or collected tax from other parties – for example, payroll taxes.
Can I still claim refunds?
You can claim refunds on returns that were due within the last three years.
What happens if I ignore my unfiled taxes?
Ignoring unfiled taxes puts you at risk of IRS assessment and involuntary collections. Also, the IRS generally will not release current-year tax refunds if you have unfiled returns from previous years.
Should I replace an IRS Substitute for Return?
Generally, you should file a return to replace a substitute for return as these returns typically overstate the tax due. However, there are exceptions – for instance, in cases where you’re applying for a settlement and replacing the SFR would not reduce the amount you need to pay.
What if I can’t afford to pay the tax owed?
You can apply for a payment plan or potentially a settlement. If you can’t afford to pay anything, the IRS will mark your account as temporarily uncollectible and pause collection actions against you.
Will filing old returns trigger an audit?
Generally, no, but if the returns indicate a high likelihood of fraud, the IRS may start to look at other tax returns you have filed.
Get Help With Unfiled Returns
No matter how far behind you are, the team at Seattle Legal Services can help you get back on track. Contact us today and we will help you figure out the best steps forward in your situation.