Unfiled Tax Returns

What should you do if you have years of unfiled tax returns?

Start by finding out what the IRS already has.

The IRS receives the income documents filed under your Social Security number: W-2s, 1099s, brokerage information, mortgage interest. Before I prepare anything, I pull those records so we know which years are missing, what the IRS is expecting to see, and what can be reconstructed.

You may have fewer returns to deal with than you think. The first job is figuring out what actually needs to be done.

How many years do you have to file?

For most taxpayers getting back into filing compliance, the IRS looks for the most recent six years of required returns. That comes from the IRS’s own policy, Policy Statement 5-133, and its Internal Revenue Manual.

It is an enforcement practice, not a universal rule. A business, a Revenue Officer assignment, or the account history can change the number in either direction. Filing years that are not required can create balances that did not need to exist.

Which years to file is the first decision in an unfiled case, and it gets made from the account, not from a rule of thumb.

What happens if the IRS prepares a return for you?

If a required return is not filed, the IRS can determine the tax from the information it already has. This is called a Substitute for Return, or SFR.

The IRS has records showing your income. It does not have the expenses, deductions, credits, or dependents that would appear on a return you prepare yourself. The tax on an SFR is calculated without them.

An SFR does not prevent you from filing your own return. When one has already been assessed, we review what the IRS used, prepare the actual return, and determine what the correct number is. The difference is often substantial.

What if you are owed a refund?

This is where the filing date matters most.

If an unfiled return would produce a refund, you generally have three years from the return’s due date to claim it. File after that window closes and the refund cannot be paid, even though you were owed the money.

People with unfiled years often assume they owe. Wage earners with withholding are frequently owed refunds in at least some years. When we review several unfiled years, identifying the potential refund years is one of the first things I do, because those deadlines do not wait for the rest of the case.

What if your tax records are missing?

We deal with this often. The IRS’s own wage and income records carry much of what was filed under your number. Bank statements, brokerage records, prior-year returns, and records from employers or vendors fill in the rest.

Missing records make an old return more involved to prepare. They rarely prevent it from being prepared.

What if filing the returns will create a tax debt?

Then filing and resolution get planned together, not one after the other.

If the completed returns will show a balance, I want to know that before they are filed. We look at the expected balance, the account, and your finances, and we evaluate the resolution options at the same time: an installment agreement, an Offer in Compromise, Currently Not Collectible status, or penalty relief, depending on the facts.

One thing worth knowing here. The failure-to-file penalty runs at ten times the rate of the failure-to-pay penalty. Filing stops the larger penalty even when you cannot pay yet, and almost every resolution requires filing compliance first.

Do you always need professional help with unfiled returns?

No. One missing return, records in hand, a straightforward year: you can likely handle it yourself.

Professional help matters more when several years are missing, when business or self-employment income is involved, when records need reconstruction, when the IRS has already prepared a Substitute for Return, when collection activity has started, or when the returns will create a balance you cannot immediately pay.

In those situations I want to understand both the filing problem and the IRS account before recommending anything.

How I handle an unfiled-return case

1. Get authorized. We file a power of attorney and speak to the IRS for you, on your behalf, so you do not have to.
2. Review the account. We pull the IRS records, including wage and income transcripts, and determine which years are missing and what the IRS has already done.
3. Decide which returns need to be filed. Six years is the normal practice. Your case gets its own answer.
4. Reconstruct the records. IRS records, your records, and third-party sources, combined.
5. Prepare the returns and identify refund years. Years with money coming back get filed before the claim window closes.
6. Plan for any resulting balance. If the returns create a debt, the resolution gets designed before the collection notices start.

I have been writing about IRS problems for years

Unfiled returns sit at the front of almost every IRS resolution case, which is one reason I have written about the subject at length.

My book How to Get Out of IRS Problems addresses back taxes, IRS notices, penalties and interest, the collection process, and the approaches to resolving tax debt. My earlier book, IRS Secrets Revealed: How to Survive IRS Audit, Collections & Appeals, grew out of experience I had already accumulated representing taxpayers, and covers what happens as matters move through examination, collection, and Appeals.

The books do not tell me which returns you need to file. For that, I need to see your account. But they reflect something that matters when you are choosing someone to handle several years of unfiled returns: I have been working with, studying, and writing about these problems for a long time.

Complimentary PDF copies of both books are available through BestTaxPro™.

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Why work with BestTaxPro™?

You work directly with Joshua A. Webskowski, EA, CFP®, NTPI Fellow, USTCP.

Josh has worked in taxation since 2003 and has represented taxpayers in IRS collection matters, examinations, and Appeals. He is an Enrolled Agent, a CERTIFIED FINANCIAL PLANNER® professional, a Fellow of the National Tax Practice Institute, an author on IRS representation and resolution issues.

His CFP® certification adds a financial perspective when a tax decision touches cash flow, assets, retirement accounts, or business decisions. His authority to represent taxpayers before the IRS and the U.S. Tax Court comes from his EA and USTCP credentials.

He has handled unfiled-return cases spanning one missing year to well over a decade.

When you contact BestTaxPro™, you are working with tax professionals who handle IRS matters. Not a sales center that hands the case to someone else after you sign up.