Some wonder if they need to file their tax returns for bankruptcy, or for a passport; and if so, how many years do they need to go back for their unfiled tax returns. Some are worried they will be arrested for unfiled tax returns. Others have found out that their deceased father or mother has not filed tax returns in years and now they need to get the tax returns done in order to move the case out of probate. Many wonder if they missed the time to claim a refund from unfiled tax returns. This article will answer all of these questions and hopefully, will provide your unfiled tax return solution.
What is the statute of limitations on unfiled tax returns? Suppose I haven't filed tax returns in 10, 15 years. How far do I have to go back?
Would you believe that if you don't file a tax return, the IRS has forever to assess you taxes? That sounds scary, but because the IRS has limited resources, the policy is that you must file for the last 6 years in order to be in compliance with the IRS. In certain other cases, it may be necessary to speak with a tax attorney to see if you need to go back further. Now, what has changed in the last 10 years, is that the IRS is getting much better at finding people's sources of income and preparing a Substitute Filed Return (SFR) for taxpayers. If you have any SFRs filed in your name, it is good to file returns for any of those years, which could be more than 6 years ago.
What if I can't pay the taxes I owe on unfiled tax returns. Should I file anyway?
Absolutely! It is not a crime to owe the IRS money, but it is a crime not to file your tax returns (full disclosure: failure to file tax returns is seldom prosecuted, especially as a stand-alone crime). Additionally, in order to settle the back taxes you owe, you need to know what you owe the IRS. You also need to show the IRS that you can comply with their rules, including filing returns for which you owe money. And don't wait until you can afford to pay the IRS to file your back tax forms. The best possible time to negotiate a tax debt with the IRS is when you have the least ability to pay. In IRS-speak we call this Reasonable Collection Potential, or RCP. Deal when your RCP is lowest, not highest!
What kind of penalties are there for unfiled tax returns?
You know how I said it is worse to not file than to not pay? This is how the IRS feels about it:
"The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you."
See? The IRS penalizes you more for not filing your return than for not paying a tax debt. So always file; then you can work out a deal to settle any tax debt. Even your 'failure to file on time' penalties can be part of an IRS debt forgiveness program.
Do I need to file my back tax returns if I am filing bankruptcy?
Yes. Also, did you know that you can file bankruptcy to discharge certain individual tax debts? In most cases, it will only work if you filed for all the years you want the bankruptcy court to wipe out your IRS tax debts for. Even if the bankruptcy court didn't require you to file your old tax returns, it is in your best interest to file any missing returns you haven't.
Can I get a passport if I have unfiled taxes? – UPDATE on Passport law here
You most likely will not be denied a passport if you have unfiled tax returns. BUT – thanks to a new law passed in 2015, you may have issues getting a passport if you have a "seriously delinquent" tax debt. The threshold is $50,000 or more, including penalties and interest, so it would be in your best interest to find out if you do owe any money. If you're concerned, we actually offer a pretty cool service where we can find out exactly what the IRS thinks about you (what years are unfiled, how much you owe, if you qualify for penalty abatement, etc). When we run this report for you, it doesn't raise any red flags with the IRS (which could happen if you call them yourself). Read more about that service here.
What about refunds. Do I still have time to claim a refund from my unfiled tax return?
If you have unfiled tax returns and are due a refund for a year you did file, the IRS will send you a Notice CP2566R which states:
"We previously sent you a CP63 notice informing you we are holding your refund until we receive one or more unfiled tax returns. Because we received no reply to our previous notice, we have calculated your tax, penalty and interest based on wages and other income reported to us by employers, financial institutions and others."
The rules are written totally in the IRS's favor. While the IRS has forever to assess you if you don't file, you only have 3 years from the date the tax return was due, or two years since the date of payment to file a return to claim a refund. The goods new, if any, is that the date that matter is the date you file with the IRS, not the date your return is eventually filed.
How do I go about filing old returns, especially if I am missing information?
This is how we prepare tax returns for our clients who are missing records:
- We first pull something called the W&I transcript to find all tax reporting forms like 1099s and W-2.
- We call city assessors for old property tax bills.
- If our clients are self-employed and have unfiled tax returns, we will have our clients give us their old bank statements and we will recreate profit and loss statements. Do old returns need to be 100% accurate? The law states "to the best of your knowledge", and that is the standard we follow before signing off on any old tax return (that is required of you as well).
The same is true if you are the executor or administrator of an estate of someone who has not filed taxes in a long time. We would follow the same process, and then you, as administrator or executor, would then sign each return to the best of your knowledge.
Don't hesitate to contact us for assistance if you're feeling nervous or overwhelmed. We help people just like you every single day.