Unfiled Tax Returns: The Handy Guide

Most permanent citizens and residents working in the US must pay taxes as long as they meet the set tax-paying requirements. 

While most people aim to stay current on their taxes, life can throw curveballs that prevent or delay you from doing so. Unfortunately, not paying your taxes can attract the IRS’s wrath- and it’s not pretty. 

For one, unpaid taxes attract penalties and interest, which cost you more. Secondly, the IRS can file tax returns on your behalf, which can be higher than what you should ideally pay. 

While there are other options to explore, reaching out to qualified tax attorneys like the Cumberland Law Group might be helpful. Sometimes, the process can be as simple as filing missed returns. We routinely help Taxpayers to file returns in any number of past due returns. It can also get significantly complicated where debt resolution strategies like Offer in Compromise or Installment agreements need to be explored. 

What Happens When I Don’t File My Taxes?

The IRS can make your life pretty miserable for failing to file returns. Here are some consequences of failing to file your returns. 

You Lose Tax Refunds

You would qualify for a tax refund if you paid an excess amount on your taxes. You are often allowed three years from the filing deadline to claim your refund. If you haven’t filed for two years, you are still eligible for your refund for the two years. 

However, if you haven’t filed for five years, you are only eligible for refunds owed to you for the three years at the tail end. 

So one consequence of not filing is missing out on tax refunds. 

However, if you owe back taxes and don’t file, other outcomes could take place. Let’s explore some of these. 

Tax Penalties and Interest

Tax penalties and interests force you to pay more than you should have, which is akin to throwing money away for not filing. 

These penalties and interests are computed as follows:

• 5% of the amount owed in taxes for every month or part of the month where the return is delayed
• The failure to pay penalty can’t exceed 25%
• Returns that are more than 60 months late attract a $ 435 minimum penalty or the amount owed in taxes, whichever is smaller

The IRS also keeps applying interest until the balance is settled. Similarly, the failure to file penalty is imposed from the first day you begin defaulting. So does the interest. 

The best thing you can do is file taxes even if you can’t pay. While the penalty for unfiled tax is 5% of the outstanding amount, the penalty for unpaid taxes is 0.05% each month. In short, unfiled taxes costs you ten times more than filed, but due taxes cost. 

One important distinction to make is the difference between late filing and late payment. Late filing refers to people who don’t hand in their form 1040 and other key tax documents before the deadline lapses. Late payment penalties affect taxpayers that don’t make the actual payments on time. 

The good news is that you can be let off paying penalties if you have a reasonable explanation for late filing. Some valid reasons for failing to file include the following:

• Natural disasters, fires, and civil disturbances
• Inability to get records
• Serious illness, death, or unavoidable absence of an immediate family member
• System disruptions that delay a timely electronic payment or filing

Issues like lack of funds, reliance on a tax professional to file, mistakes and oversights, and lack of knowledge are not justifiable reasons for failure to file. 

Identity Theft

A less thought-about result of not filing returns is identity theft. Though this hasn’t been at the forefront as much, it’s increasingly become a concern in recent years. 

With tax-related identity theft, scammers steal your identity through your social security number and file fake returns. Because their bank account is attached to the phony filing, your tax refund is sent to them. 

When you attempt to file back taxes past the deadline, you will experience processing delays. 

This is something you can avoid by filing your returns as early on as possible to do so. This lessens the risk of scammers trying to get your refund through identity theft and fake filing. 

Substitute for Return

The IRS doesn’t always complete information on all taxpayers. Therefore, when it decides to proceed by filing a Substitute for Return (SFR) on a taxpayer’s behalf, it often overstates the amounts due. 

This has two outcomes. The first is that you end up paying more than you should. The other is that the overstated amount eats into your tax refund, meaning you get less than you would have, had you filed your taxes. 

It’s a lose-lose. 

As such, it’s best advised that you file your returns and take advantage of all available credits, exemptions, and deductions. SFRs tend to be higher because the IRS doesn’t factor in any of these when it files on your behalf. 

Luckily, an SFR doesn’t just happen. Before one is filed, the IRS mails you to let you know they haven’t received your tax forms and for which duration. It then gives you their evaluation of what you owe, interest, and penalties included for the given period. 

Once you receive this, you have 30 days to:

• Submit form 1040 or other required forms
• Agree to sign a Consent to Assessment and collection form
• Notify the IRS of the reasons you think you shouldn’t file and provide special reasons you believe the IRS should consider

When the IRS does not get a response from you, it files a statute notice of deficiency (SND), also known as a 90-day letter. Basically, this letter lets you know that the IRS will assess your tax debt alongside the applicable penalties and interest. The 90-day letter also lets you know your right to petition the US Tax court within 90 days. 

Without a response to the SND, the IRS can then proceed to assess taxes and go into collection against your tax obligation. 

How Does The IRS Collect Unpaid Taxes?

When you fail to file, and the IRS prepares a Substitute for Return (SFR) showing your outstanding balance, it collects this amount. The same goes for unpaid taxes. 

This is typically through a lien filing and attaching your property or rights to your property. 

This can be done through wage garnishing, placing a levy on your bank account, joint, personal, or joint, and diverting payments from your contracts to the IRS. 

The IRS can also seize boats, cars, and homes.

What Do I Do About My Unfiled Taxes?

While the IRS can make your life difficult for not filing returns, it’s not all gloom and doom. We shall see what you can do to dig yourself out of the hole. 

But before we get to that, let’s first determine if you should be filing in the first place. 

Luckily, the IRS has clear rules regarding who must file returns. For the individuals in this criteria, filing should be done yearly. 

As of 2022, you should file taxes if:

• Your income surpasses the $12, 550 threshold, and you are filing as single
• You are filing as married filing jointly or as a  qualified widower with an income over $25,100
• your income exceeds $18, 800 and you are filing as the head of your household
• You owe household employment taxes
• You owe the alternative minimum tax
• You owe Medicare or social security taxes on tips
• You owe an early withdrawal penalty to the IRA or 401(k)
• You are self-employed with net earnings surpassing $400

There are different rules for people listed as dependents on another person’s returns. Similarly, there are additional stipulations for people over 65. For example, people over 65 and filing as singles are exempted from filing unless their gross income is above $14,250.

Another thing to note is that income thresholds are revised every year. What is provided above are the regulations for 2022. To be on the safe side, always look at the filing requirements every year. 

So what can you do when you miss a filing? 

When you have missed a filing, filing it as soon as possible is an excellent place to start. 

You can do this yourself. Alternatively, you can hire a tax attorney to help you handle your back taxes and unfiled returns. There are multiple benefits to the latter. 

The first is that you get a professional who has handled similar incidents. They know what to do, when, and how, meaning they get things done much faster and more accurately.  

The second is that a tax attorney is also conversant with tax law. This means they can pre-empt and handle potential legal problems on your behalf. 

If you choose to handle the filing on your own, here are some steps to follow:

• Contact the IRS to know the balances on your account, who your case officer is, and whether they have filed an SFR on your behalf
• Request your income transcripts for the unfiled years
• If there is an assessment of taxes in place, request time to file for the unfiled years and do so as a matter of urgency
• Get all your investments and income information, your W2 and 1099 transcripts.
• Review the unfiled years in question and note down any deductions and credits you were eligible for
• With all these at your disposal, file the back taxes using the forms from the year you missed the filing, not the current year. Because tax codes get occasional revisions, using the form from the corresponding year ensures you get all the credits and deductibles applied at the time. These are important because they lower the amounts owed

How Many Years of Back Taxes Should I File?

For how many years have you skipped filing your returns? Therein lies your answer. 

You need to file back taxes for the years you have failed to do so. Therefore, you will file for five years if you have not filed for five years and three years if you have yet to file for three years. 

However, if you haven’t filed for ten years, you are only required to file for the last six years. There is an exception to this, however. If the IRS suspects you have acted fraudulently or avoided taxes, it has the right to backtrack on this six-year rule and scrutinize your accounts for more than six years. 

Paying Taxes Form Unfiled Returns

There are two ways to go about this. The first is simple: you have money to pay the back taxes, and you do so. Matter settled. 

The other is when you owe back taxes but lack the funds to settle your tax debt. In this scenario, the IRS offers you multiple debt resolution options. 

These include:

• Payment plans: you come up with an agreeable monthly installment payment plan
• Partial payment plan: this is similar to a payment plan, only the IRS reduces your balance and splits the amount into monthly payments
• Offer in compromise: occasionally, the IRS will allow taxpayers to settle their debt for less than is owed. In most cases, you must pay the amount in a lump sum. Sometimes, you get up to 24 months to complete the payment. 
• Penalty abatement: this removes penalties from the taxes you owe, which in effect, reduces the total amount owed
• Currently not collectible: this is considered for taxpayers going through intense financial hardships who can’t afford to pay the IRS or handle their living expenses. Here, the IRS can pause collections until such a time when you are financially able to make payments.

Feeling Overwhelmed?

If all this seems overwhelming, that’s probably because it is. Tax laws are complex and keep changing, making it hard to stay on top of things. But that is precisely what tax attorneys at Cumberland Law Group do: we make it our business to understand our tax laws thoroughly, so you don’t have to. 

Reach out to us today with all your tax-related concerns, and let us help you regain control of your financial life.