Having unfiled taxes is actually quite common, so let’s talk about options if you have unfiled taxes, including unfiled international reporting forms like the FBAR. More and more people are addressing this issue since the law passed saying that your passport can be revoked or denied if you have unpaid tax debt.
Recently, we were asked the following question:
I’ve been unfiled for 3-4 years. How long before they do an SFR on me?”
Generally, within a year or so of not filing your tax return, the IRS will do something called a "Substitute Filed Return". When you don’t file your taxes, the IRS files them on your behalf using things like 1099s, W-2s, and K-1s. More often than not, the SFR shows that you have a much bigger liability than you actually do! Also, if they file an SFR and you do not sign it, that means they have forever to file and assess you more.
We are assuming the person that posed the above question to us has not heard from the IRS yet is because they are understaffed. But that doesn't mean you're safe to hide from them forever. Read on…
How much time does the IRS have to come after you for unfiled returns?
If you do not file a return, the IRS technically has forever to assess taxes as the statute of limitations of assessment (ASED) does not begin to run. But, some good news! The IRS policy is that if you do decide to get up to date and file old returns, you only need to go back and file for the past 6 years. In some circumstances, you may have to go back a little bit further.
What if you file, then find out you owe, and you can’t afford?
Even if you find that you owe money, you should still file the return. If you don't have the money to pay, this could be the best time to settle your back taxes….not in the future when you have money. The only way to settle a tax debt, is to first have the IRS recognize it with a tax return.
Option #1 – An IRS Offer in Compromise –
This option gives you the opportunity to negotiate with the IRS and pay back only a portion of what you owe in a lump sum. When working with the IRS, you have to ensure you can back up why you claim you can only afford the amount offered!
Option #2 – An Installment Agreement
This is also a negotiation tool. In this case, you can work with the IRS to come up with a monthly payment. There are two major types of Installment Agreements. The first type is one that will pay back the IRS the entirety of the back taxes. The other type, known as a Partial Payment Installment Agreement (PPIA), will pay the IRS some fraction of the entire debt back.
The "collection time clock" will run while you are in an Installment Agreement.
Option #3 – Currently non-collectable (CNC)
This option is good if you are truly in a hardship status and can't afford to pay anything to the IRS. We only recommend this to clients who do not think their financial situation will improve. If you are in CNC status, the IRS will check back on you from time to time. If your financial situation changes for the better, they will then want to take "their fair share" from you.
The "collection time clock" will run while you are in CNC.
Option #4 – Bankruptcy
Many people are surprised to find that bankruptcy will erase federal tax debt. It is a tool that should be handled carefully. We only recommend filing for bankruptcy in certain situations.
What if I file my returns and find out the IRS owes me money?
This is another reason why you want to act quickly. 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 IRS hasn’t contacted me about my unfiled tax returns. Why should I bother?
It’s not criminal to owe money to the IRS, but it is a crime to not file. While the IRS is understaffed right now, it doesn't mean you're in the clear. Think of the IRS as a giant oil tanker. It takes miles and hours for the tanker to get up to speed. But once it's up to speed, it has incredible power and is hard to stop.
You may not be on the radar of the IRS right now, but once you are, they will do everything in their power to get "their fair share".
What if I don’t have any records, how can I file my return?
W-2s, 1099s, 1098s, K-1s, etc. are all going to be on your IRS records. You can certainly reference your bank records. We also use an IRS report called a W & I Transcript that tells us all of our clients income and withholdings. Also, you can use industry averages.
What if my unfiled returns include foreign accounts?
There are programs that you can get into for unfiled foreign reporting requirements such as FBARs and IRS Form 8938. The IRS has been targeting overseas accounts as of late, so it's best to get into compliance sooner than later.
From our experience, most people with unreported accounts are not criminals. They are simply US taxpayers who don't realize they have to tell the IRS about accounts they have in other countries.
For more information about the different offshore reporting programs, click here.
Once you realize you have a reporting obligation, contact us for help. There are penalties for non-reporting. There are "willful" penalties, and "non-willful" penalties. The difference is staggering, and once you know the obligation exists and you knowingly dodge the requirement, you become "willful".
Call us at 888-727-8796, or email email@example.com.