The following is a transcript of what we covered in this latest webinar on Unfiled Tax Returns:
Hi, this is Anthony Parent of Parent & Paren LLP, the IRS Medic and in this video, we’re going to be talking about what to do about those unfiled tax returns. You’re actually far from alone if you have unfiled tax returns and we’re going to talk about why you really want to get them filed. We’re going to talk about how many years you need to go back and we’re going to talk about why shouldn’t worry about what you owe when you file the tax returns and then we’ll finally conclude with what to do if you’re missing records.
I have three phrases for you. “Haven’t filed taxes in five years.” “Unfiled taxes 10 years with the IRS.” “Have to file 20 years of back taxes.” Guess what those questions are? Those are all searches in Google with significant traffic. These are very common search terms, something about 1,000 to 4,000 searches per month. So if you’re looking and wondering what to do when you haven’t filed 5, 10 or 20 years, you’re not alone.
So anyway, millions of unfiled tax returns and willfully failing to file a tax returns is a federal crime but guess what, there’s only 3,000 tax indictments a year and if someone is serving on a jury, if there’s millions of unfiled tax returns, don’t you think a juror might have an unfiled tax returns and maybe would not find a guilty verdict, that’s incredibly rare for somebody to be charged and convicted of having unfiled tax returns. And two years ago, I saw one from Massachusetts that somebody was convicted of unfiled tax returns, but really what the case is about, they were charged with a whole bunch of other stuff, they just ended up being guilty for failing to file a return. So even that case was somewhat of an exception. If you’ve only have unfiled tax returns, you’re really not at risk for criminal charges unless there’s something else going on there.
There are so many unfiled tax returns in the IRS rainbow. There’s so many – there’s actually a whole program, it’s called the Automated Substitute for Returns program and what the ASFR does is it creates an ASFR which is a return that the IRS prepares for you if you don’t file. What they do is they look at the 1099s, W-2s, K-1s, anything like that and they put it on a mockup return and they’ll send it to you and you might ignore it but they’ll send it to you and they’ll say, “Hey, you haven’t filed a return, this is what we think you owe. Sign it if you agree with it, otherwise we’re going to send you that bill.” And so that happens a lot and one of the big things to understand is that the ASFR, this program is much stronger than it was 10 years ago that they’re reporting on W-2s, 1099s, all these things. The IRS is just much more on top of it and so a lot of people do get these ASFRs done and these ASFRs have huge significant liabilities that tend to freak people out and make them scared to confront the problem.
So when the IRS does prepare the substitute file return, this ASFR, don’t look for them to do you any favors, they’ll not going to lower your taxes, which kind of makes sense because they want you to file a return because at this point when they’re preparing it, you’ve never signed under oath that it’s actually true and accurate. They really want you to sign something so they can get you if you did include all your income and if they do ASFR, they always can assess more. If you never file a tax return they’ll have forever to file and assess you more.
Now, let’s talk about why you really want to file those tax returns. Now, we talked about criminal charges really isn’t the reason why, really isn’t. Sure it’s a possibility that I should say something about it as being an attorney but it’s really not a big risk. The reason really why you wanted to file your returns is your SFR is going to be a higher bill than what you really owe. They’re not probably going to look for your deductions. If you have an ASFR, it cannot usually be discharged in chapter 7 bankruptcy, and you know, we had to just put a whole bunch of asterisk around bankruptcy, the rules are different from jurisdiction to jurisdiction about what can be discharged. Some jurisdiction say that if you file an SFR, you can never discharge them in bankruptcy, although I’ve seen it done. Another one, it’s fine if you just file a return after an SFR is there. So really you’d want to check with a bankruptcy attorney who specializes in your area. You can’t hire a national one, it has be someone in your area, in your District Court to whether or not a return can be filed to discharge an SFR.
If you’re looking to settle back taxes, you’ll need them filed, and in some way it doesn’t make all that much sense but in other way it does because when you file a return, all your return probably going to have more than you can normally pay back and, you know, what is the matter if the ASFR says you owe $2 million when you really owe $500,000 or whatever the case may be, you really not going to pay any of that back. What the IRS wants is they want you to get in that habit of compliance where you’re signing something under penalty of law that this is the amount you owe to the best of your knowledge. And the other reason again is that if you do not file a return, the IRS has forever to assess taxes and that’s true. Now, typically there are some limitations about when how much at least they can have, but you know, things are really different than they were, say, in 1980. You know, in 1980, how many records were electronic? Not many. But now, records are electronic and they can kind of be kept for forever. So can you imagine somebody in 2015 who doesn’t file a return, you think that in 20 years that the IRS might be able to have those record somehow, somebody stored and hung on to those records. That’s kind of, you know, possible. So maybe you have a tax now that you’re not even going to – that’s not even going to be presented to you for years if you don’t file your tax returns. That’s the other part of it is that if you do not file tax returns, the statute of limitations of collections doesn’t begin to rot.
So if you owe for 2015 and you don’t file your taxes forever that 10-year window, that 10-year time period hasn’t even begun. So that’s really a big problem. That’s a big reason why you want to get this going and as again, as I said, because I’m an attorney, I guess you should file also because it’s the law. And the big reason why you want to get those returns filed is you can’t get tax problems behind you without doing this and that’s really a thing. This is how you start the road if you’re getting it behind you — just getting any unfiled returns that need to be filed, filed which leads us to our next questions. Well, how many do we have to file? Do we have to go back 5 years, 10 years, 20 years? And there are definitely people who aren’t filed for 20 years.
The policy has been six years, it’s the general rule of the IRS and I can do a 30-minute presentation about why that six years is there, but I’ll just tell you, six years and then sometimes, you know, as I said, the ASFR program is much different than it was 10 years ago that before when I started doing tax resolution work so many years ago, people always go back six years, why? Because there weren’t really a lot of SFRs done, maybe there were two or three SFRs in more recent years but now what we’re seeing when someone is coming in 2015 owing taxes, well, there’s going to be SFRs back six years. And really there’ll be SFRs back to 2005 and the only thing that’s not assessed is maybe the last few years like 2014, 2013, 2012. So what we have to do is we have to file a tax return to check out that ASFR, technically it’s called an audit reconsideration. So really that six-year look back period isn’t so critical as it used to be because that SFR program is so strong.
Now, there’s some exceptions to the six-year, let’s just assume that there are no SFRs, you would file the six years and then you would then return for any SFRs that are still of balance due just to lower that and also to show the IRS that you want to be in compliance. And then some other exceptions to that six years that could pop up is if you have some offshore income and you have unfiled returns. There might be some circumstances where you’d be looking to eight years back, that’s a whole big long webinar and then also there’s different rules for expats, three years, maybe fine and so you would definitely want to get a legal opinion on which years you would have to get back if you are unsure.
Now, here’s one question submitted. “Wow, Anthony, you have convinced me to file my back tax returns with the IRS. What a handsome and wise genius you are, thank you. But one issue is practical, I am missing records so what should I do?” Again, your W-2, 1099, 1098, K-1s, all of those tax reporting documents are going to be on records. You would request something called your W&I transcript from the IRS. They would mail that to you and they’ll list all of your income and any withholdings that occurred. You could also get your bank records kind of – although these banks would love to charge money for that, so you could bother somebody up at the bank and print those up for you for free, usually the last three years you can get online, but going back more they will have – they’re just looking for an obscene amount of money.
This is how banks make money now, so that’s one way and also gives us a good general idea because one of the last techniques that we use is something called biz stats and we use general guidelines, the typical margins of likeminded businesses. Just say that you own a pizza place and you had a really good idea that you made, you grossed $500,000 a year. We could use biz stats to say, “Well, if you gross $500,000 a year, generally this is what you pay for rent, generally, this is what you would pay for food cost, generally this is your labor cost” and then we’d be able to get a likely net income, and that’s really what we’re all legally required to do. It’s just something that’s based in reality and is really your best guess. That’s really what the law requires. Is it the exact number? No. But it’s a really great reasoning and great system to coming up with a name and it’s actually what we do in an audit, under audit situations when we are missing records for reasons such as fires, floods, etc or just being thrown out.
This is Anthony Parent of Parent & Parent LLP and I hope I answered some questions about what to do about those unfiled tax returns. Visit IRS Medic, we have a lot of information on there or if you are wondering if you have what it takes to be a client of ours, email firstname.lastname@example.org. We do look at everything. And this is Anthony Parent of IRS Medic and I thank you for watching.
If you need help with your unfiled returns, contact us. We can help.