The consequences of not filing your taxes can range from missing out on refunds to facing significant tax penalties and even potentially facing criminal fraud charges. Most people won’t go to jail or face criminal charges for unfiled tax returns. Still, it’s important to act quickly to avoid the accumulation of penalties and avoid any potential legal ramifications.
People contact our office regularly to find out what happens if they don’t file. The answers vary depending on the situation, but to give you an idea of what to expect, this article provides an overview of what can happen when you haven’t filed your taxes over multiple years.
Want to get help now and put this stress behind you? Contact us at Wiggam Law today. We’ll talk with you about the consequences of unfiled returns and help you get caught up in the most cost-efficient way possible.
Why File Your Tax Returns as Soon as Possible?
First, it’s important to file your tax returns as soon as you can, even if you have several years of outstanding tax returns. Reasons to file promptly include being able to claim any refunds you are entitled to before your eligibility to claim a refund expires, avoiding tax penalties such as failure to file or failure to pay, and preventing further IRS collections actions, such as:
- Filing a federal tax lien on your property
- Seizing your assets or garnishing wages via a levy
- Pursuing legal charges related to tax evasion or tax fraud
Penalties can add up quickly. The IRS will assess late filing and late payment penalties against any late filed and/or unpaid tax return. The maximum IRS late filing penalty is 25% of the unpaid tax amount associated with the tax return. The maximum IRS late payment penalty is also 25% of the unpaid tax amount associated with the tax return. If the IRS can assess both a late filing and late payment penalty, the combined maximum penalty for both is 47.5% of the unpaid tax amount related to the tax return.
Another action you want to avoid is the IRS filing a substitute for return (SFR) on your behalf when you don’t file a tax return. If this happens, the IRS will likely not include any tax credits or deductions you may qualify for, so you will likely end up with a higher tax bill. Filing your original return will allow you to claim these tax credits or deductions that you are entitled to.
The IRS will send you a CP59 Notice, which alerts you that you didn’t submit a tax return for a specific tax year. Follow the instructions on this form carefully and submit your return as soon as possible to prevent an SFR from being filed on your behalf. This can also help limit the penalties associated with the late filing of the tax return. Talk to a tax professional about CP59 if you have questions.
Tax Filing Deadlines for Different Scenarios
The next sections indicate important timelines and scenarios that illustrate just how important it is to file your tax return.
Claiming a Tax Refund: Three Years to File
Even if you aren’t required to file a tax return for a certain year, you may want to file any tax returns where you are eligible to receive a tax refund, as you have a limited amount of time to do so. You only have three years from the original tax return’s filing due date to file your tax return and receive a tax refund. Once that deadline passes, you can still file but forfeit your refund.
On average, Americans filing as individuals receive about $3,000 annually in tax refunds, but many of these are left unclaimed. For example, the IRS’ latest data shows that over $1 billion in unclaimed tax refunds were associated with the 2020 tax year.
Owing Taxes: Unfiled Returns & SFRs
The IRS can technically look back an unlimited amount of time if you haven’t filed your tax returns. However, the good news is that the IRS usually only looks back six years for unfiled returns. There are exceptions to this rule, particularly if tax fraud is involved. Because of this, filing any missing returns from the last six years that would have a balance owed before the IRS issues a notice regarding the unfiled return is recommended. By filing before the IRS issues a notice regarding the unfiled returns, you may be able to minimize penalties, avoid the risk of having an SFR substitute return generated on your behalf by the agency, and avoid any potential legal ramifications.
If you eventually file your missing returns, the IRS will retroactively apply interest and penalties to your account. If you don’t file, the IRS may send you the CP59 notice and/or a non-filer notice with Form 15103. Then, if you don’t respond to that notice, the IRS may generate an SFR, as mentioned above.
The IRS’ SFR preparation solely relies on income numbers reported to them by other parties. An example of this information provided would be the W-2 wages you receive from your employer or a 1099 for an IRA distribution from your financial institution. As previously mentioned, the downside to the SFR creation by the IRS is that it doesn’t usually include any deductions or credits you might be entitled to. This typically results in a higher tax liability than if you had filed your tax return voluntarily.
You can contest an SFR filing by filing your own prepared initial tax return. The IRS will review and potentially adjust the SFR tax return filed based on what you submitted. However, filing the missing tax return before an SFR is prepared is a much easier process.
Consulting with a tax attorney about your unfiled returns will help you determine the best strategy based on your unique situation. There might also be situations where you aren’t required to file a tax return, which can be discussed.
Financial Consequences of Not Filing Tax Returns
Not filing tax returns can have a variety of financial implications, including the following:
- Failure-to-file penalties of up to 25% of the balance owed.
- Failure-to-pay penalties of up to 25% of the balance owed.
- Fraud penalties of 75% of the balance owed, if applicable.
- Interest from the due date of the return until you pay, at the federal short-term rate plus 3%.
- Risk of the IRS generating a substitute tax return and assessing a higher tax liability than you might actually owe.
- Risk of the IRS keeping refunds to cover taxes it thinks you owe due to unfiled returns.
- Inability to prove your income for car loans and mortgages.
- Difficulty renting an apartment if the landlord wants to see your tax return.
- Inability to prove your income for social assistance programs.
Additionally, if you have filed some years but not others, you may struggle to make payment arrangements on your tax debt. Generally, the IRS only approves payment plans or offers in compromise if you have complied with the last six years of filing requirements.
Criminal Charges for Unfiled Tax Returns
In some cases, the IRS will pursue criminal charges for unfiled returns in instances of tax fraud or tax evasion. This applies if the IRS can show that you willfully tried to evade your tax obligations. This doesn’t apply to most people, but if you are worried about potential criminal charges based on your situation, you should contact a tax attorney right away.
How long can the IRS pursue criminal charges for tax evasion? Based on the statute of limitations, the IRS has six years to pursue tax evasion charges from the statutory tax return filing due date or six years from an affirmative act to evade a tax, whichever is later.
IRS Notices for Unfiled Returns
If you don’t file your tax return, the IRS may send you the following notices:
- CP59 Letter: As mentioned above, this notice alerts you that the IRS hasn’t received your tax return and requires you to file it.
- CP 2556 Notice: If the IRS has prepared an SFR for you, you will receive this notice. This notice will let you know that the IRS has calculated your tax, penalty, and interest based on the income information it received from outside third parties like your employer or your financial institution. You will have 30 days from the issuance of this notice to file your original tax return.
- Statutory Notice of Deficiency: If you don’t file your tax return within 30 days of receiving the 2556 Notice, you will then receive the Statutory Notice of Deficiency in the mail. This will again outline the proposed tax, penalty, and interest from the generated SFR. You have 90 days to file a United States Tax Court Petition when you receive this notice to dispute the SFR calculations. If you do not file a Tax Court Petition promptly, the proposed tax, penalty, and interest from the SFR will be officially assessed.
If you do want to file a Tax Court Petition, you should have a Tax Attorney represent you. United States Tax Court can be complicated both in terms of following the correct procedures and in understanding the laws that relate to your situation.
Alternatively, if you are unable to file a Tax Court petition, it would be recommended that you file a correct return during the 90-day Statutory Notice of Deficiency time period so that the IRS can potentially adjust the SFR based on your original return filing before the tax, penalty, and interest are officially assessed.
Other Considerations if You Haven’t Filed in Years
If you haven’t filed in years, contact a tax professional to help you get caught up. Depending on the situation, they may recommend that you file the last six years of returns, or they may steer you toward an eligible voluntary disclosure program. The IRS and States suggest talking with a tax expert before filing under the voluntary disclosure rules.
Here are other steps to take if you haven’t filed taxes in years:
Gather Financial Records
Start gathering your financial records. Contact old employers and financial institutions if you need those records. If you own your own business, start looking through your account records for income and expense information. You can get some old income documents by requesting transcriptsfrom the IRS website.
Pursue a Penalty Abatement Request
The IRS may allow a penalty abatement in certain situations, which can help remove any penalties you’re hit with r in association with the late filing or payment of your missing tax return. You might be eligible for a first-time penalty abatement if you have a “good tax compliance” history and haven’t had any penalties in the last three years prior to the return(s) you are filing. You also might be eligible for a penalty abatement under reasonable cause. This will depend on your situation and circumstances that led to the delay in filing your missing tax returns and the delay in being able to pay those tax balances on time. A Tax Attorney can help discuss your potential qualifications for a penalty abatement request.
Work With a Tax Expert
Tax returns involve a lot of numbers, but back taxes go beyond the numbers. People tend to experience fear, stress, or even anger when they haven’t filed in a long time. That can be very overwhelming, but it’s a lot easier when you have an experienced tax professional in your corner. Work with an expert who can help guide you on the right path forward.
What If You Can’t Pay Your Tax Bill?
One of the biggest reasons people tend to ignore old tax returns is because they want to avoid facing the bill. They’re worried that they will have a balance they can’t afford if they file. They often think that it’s “safer” just to stay off the IRS’ radar.
That’s not the case. It’s almost always better to be in compliance and file your back taxes. There are many different payment options for people who owe the IRS, including the following:
- Installment Agreement — This is a monthly payment plan that is either a full pay agreement or a partial pay agreement. The type of agreement will depend on your current financial situation.
- Offer in Compromise — This is a settlement program offered by the IRS. You will have to give the IRS detailed information about your assets, monthly income, and monthly expenses to determine if it is in the best interest of the IRS to settle for a lesser amount than what is owed by the taxpayer.
-
- The Offer in Compromise is a frequently misunderstood program for resolving tax liabilities. To learn how OICs work and if you might be eligible, download our free whitepaper:
- Download Our Free OIC Whitepaper
-
- Currently Not Collectible Status — Currently not collectible means that you have insufficient assets and income to be able to afford a payment arrangement with the IRS. In this case, the IRS marks your account as not collectible. You will not have to worry about any collection action, such as levies or garnishments, as long as you stay in that currently not collectible status or until the IRS writes off your balances due to meeting its expiration dates. If your financial situation improves in the future after being placed in a currently not collectible status, the IRS might remove you from that status and request updated financial information to see if you qualify for an installment agreement.
FAQs
Here are answers to the questions we often hear about unfiled taxes. If you have additional concerns, contact us directly.
How many years back can you file taxes?
Theoretically, you can file back taxes from any year. Luckily, in most cases, you only need to file the last six years if you get behind. However, the agency may make you file returns older than six years if you owe a substantial amount or if tax evasion or fraud is involved.
What happens if you don’t file taxes for two years?
If you owe taxes, you will incur a maximum late filing penalty of 25% of the unpaid tax balance for any year that is five or more months late. You can also incur a late payment penalty if you owe a balance. You still have time to file and claim if you are due a refund. The IRS has the ability to file SFRs on your behalf if you are past the filing deadline for a tax return.
What happens if you don’t file taxes for five years?
If you don’t file taxes for five years, you will forfeit all refunds that are over three years old (if applicable). You also put yourself at risk of the IRS assessing interest and penalties against you. The IRS has the ability to file SFRs on your behalf if you are past the filing deadline for a tax return. However, don’t get stressed out and give up, it is possible to get caught up.
What if I haven’t filed taxes in 10 years or 20 years?
Generally, if you haven’t filed in 10 to 20 years, the IRS will only make you file the last six years of returns. However, the agency may make you file older returns if you owe a substantial amount or if fraud is involved.
What happens if you never file taxes?
If you never file taxes, you can miss out on thousands of dollars of tax credits every year. If you owe, the IRS will eventually find you and assess taxes and penalties against you. You may even face criminal charges if you didn’t file due to evasion.
How many years can you go without filing taxes?
If you don’t have a filing requirement, you can go your whole life without filing taxes. However, if you were supposed to file and didn’t, the IRS will eventually find out, and you can face significant consequences.
Even if you never get caught, not filing tax returns can compromise your financial life by making it hard to take out loans, buy a home, or get some types of jobs.
How far back can the IRS go for unfiled taxes?
There is no time limit on how far back the IRS can go if you have unfiled taxes. The statute of limitations to audit a tax return is usually three years, but there’s no time limit if the return was never filed. Yes, that means the agency could theoretically ignore the situation for decades and then start assessing old tax debts against you.
Can you go to jail for not filing taxes?
Yes, you can go to jail if you haven’t filed in an attempt to evade taxes, but even in tax fraud or evasion cases, the IRS generally levies civil penalties. Criminal prosecution is possible, but it tends to be relatively rare.
An average of a few hundred people are sentenced for criminal tax evasion yearly. While that number may sound high, it’s extremely low considering the number of taxpayers in the country.
When can you request penalty abatement for unfiled returns?
If you received a notice such as the CP59 notice, which alerts you of an unfiled tax return, you can submit a penalty abatement request with the filing of the return, or you can submit the request after the tax, penalty, and interest have been assessed. Sometimes, the IRS issues administrative waivers regarding penalties, or you could qualify for first-time abatement if you have an otherwise good tax compliance history.
Get Help With Unfiled Tax Returns
At Wiggam Law, we help taxpayers with many different tax issues and a wide range of debt levels. We have saved clients hundreds of thousands of dollars by helping them to catch up on unfiled returns. The best approach to handling the filing of any unfiled return will vary based on your situation.
If the IRS or State hasn’t noticed your unfiled returns yet, there may be an option to submit your tax returns through a voluntary disclosure program. This lets you get back into good standing with the IRS or the State by limiting the returns you have to file and potentially get penalties waived. However, even if you aren’t eligible for a voluntary disclosure program, the attorneys at Wiggam Law will be able to discuss all available options based on your situation.
Want to discuss the best approach for your situation? Call us at (404) 233-9800 or fill out our online consultation form to schedule a meeting. The experienced tax attorneys at Wiggam Law look forward to helping you with your missing tax return situation and restoring your peace of mind.