Taxpayers Guide to Unfiled Taxes Based on Different Time Frames
The consequences of not filing your taxes vary based on how much you owe and how long it’s been since you filed. If you haven’t filed taxes for several years and you’re worried about what’s going to happen, you are not alone. Many people are in the same situation.
The good news is that there are ways to catch up on your unfiled returns, and the process may be easier than you think. However, you should act quickly if you want to minimize the consequences. To help you out, here is an overview of what happens if you don’t file based on different timelines.
Consequences of Not Filing or Filing Late
Not filing your taxes can get you in financial and potentially legal trouble. It can also cause you to miss out on valuable refunds, and it can make it hard to apply for loans, buy a home, get healthcare subsidiaries, or handle other financial essentials.
Here’s a look at the timeline of consequences based on how late your return is.
If you are even one day late, the IRS will assess a failure-to-file penalty of 5% of your tax owed. This penalty doesn’t get assessed until you file a return or the IRS files a return on your behalf. Then, it’s backdated. For instance, if you file your tax return three months late, you will incur a failure-to-file penalty that is 15% of your balance.
Once you are 60 days late, the IRS will assess a minimum failure-to-file penalty of the lesser of $450 or 100% of your tax due. This only applies if these penalties are higher than the typical 10% failure-to-file penalty that accrues after two months.
For instance, if you owe $200, your penalty will be $200. If you owe $500, your penalty will be $450. If you owe $10,000, your penalty will be $1,000.
The failure-to-file penalty only applies for the first five months you are late, but there is also a failure-to-pay penalty. These penalties get folded together for the first five months. At this point, you have incurred a 4.5% failure to file penalty plus a 0.5% failure to pay penalty for the last five months. Your penalty right now is 25% of your unpaid tax.
Going forward, you will no longer incur the failure-to-file penalty, but you will continue to incur the failure-to-pay penalty at a rate of 0.5% per month. If you file your taxes and set up a payment plan, you can reduce this penalty to just 0.25% of the balance per month.
12 to 24 months
The IRS can file a substitute for return (SFR) on your behalf at any point after your return is one year overdue, but generally, the agency takes at least two years to file this form. The IRS uses income documents it has received in your name, but it doesn’t give you any deductions or credits. Once the IRS has issued an SFR, it can start collection actions against you.
After the three-year mark, you can no longer claim a refund from an unfiled tax return. For instance, to claim a refund for tax year 2022, you must file a return by April 15, 2025. That is three years from the original due date.
The failure-to-pay penalty caps out at 25%, and it gets applied at a rate of 0.5% per month. That means that this penalty usually maxes out once you are four years and two months late. At this point, you will have a total penalty of 47.5%. For instance, if you owe $10,000, the penalty is $4,750. If you owe $100,000, the penalty is $47,500.
That is the 22.5% failure-to-file penalty which applied at a rate of 4.5% for the first five months, plus the 0.5% failure-to-pay penalty, which applied for 50 months. In some cases, your penalties may reach this level sooner. If the IRS sends an intent to levy notice and you don’t respond within ten days, the failure to pay penalty increases to 1% per month.
Three to five years
If the IRS has issued an SFR, you may be facing collection actions such as tax liens, wage garnishments, or levies. To stop these things from happening, you need to contact the IRS to make arrangements to pay your tax debt or apply for uncollectible status.
Typically, the IRS only looks back six years, and if haven’t filed for six years, you may still be able to claim refunds for the last three years. If you owe tax for previous years, you can use the refunds to offset your balance due.
The IRS only has 10 years to collect tax debt, but the clock doesn’t start until you file a return or the IRS assesses tax through an audit or SFR. If you haven’t filed for 10 years, you typically only need to file the last six years of returns, but once you file, the IRS will have 10 years from the date that you file to collect the debt.
What If You Haven’t Filed Taxes in Years
The above timeline outlines what to expect based on how long it’s been since you filed, but what if you haven’t filed in years? Here is a breakdown of what to expect based on how long it’s been since you filed.
- Haven’t Filed Taxes in Three Years — If the IRS owes you money, you still have a chance to claim your refund. If you owe taxes, you will have incurred penalties and interest on your account.
- Haven’t Filed Taxes in Five Years — You may still be able to claim a refund for the latest three years. Interest and penalties will be accruing on any tax that you owe. By this time, the IRS may have generated a substitute for return (SFR). That assesses the tax against you so that the IRS can start collection actions.
- Haven’t Filed Taxes in 10 Years — You’ve lost at least seven years of refunds, and if you owe tax, your penalties will be nearly 50% of your unpaid tax bill. If the IRS has assessed tax with an SFR, you may be facing tax liens, wage garnishments, or other collection actions.
- Haven’t Filed Taxes in 15 Years — You will be dealing with the loss of refund, penalties, and collection actions as detailed above. Even worse, your financial situation is likely to have suffered over the last 15 years. Without tax returns to prove your income, it is very difficult to get loans, health insurance, and other essentials. You also cannot qualify for some jobs if you have unfiled tax returns.
How to Deal With Unfiled Returns
To file back taxes, you need to collect financial documents for years you didn’t file. Then, you need to complete and file the tax returns for those years. This process can be frustrating and confusing. Here are some tips to help you:
- Set up an online account to request wage and income transcripts — With a smartphone, an email address, and a state ID, you can set up an online IRS account. Once established, you can download information that other people sent the IRS about your wages and income. For instance, you can get transcripts of W2s from your employer.
- Ask a tax professional to help you — Unfortunately, most of the IRS transcripts have critical information like payer EIN blanked out. However, a tax pro can help get you unmasked transcripts.
- Contact payers for information more than three years old — The IRS website only shows transcripts for the last three years. If you need wage and income documents for years prior to that, you may need to contact the payer directly. Alternatively, look through bank records or paper records for old pay stubs.
- Recreate W2s as needed — If you’re missing old W2s, you can file Form 4852, (Substitute for Form W-2 Wage and Tax Statement) with your tax return.
- Consider retroactive bookkeeping — If you need to file taxes for self-employment or business income, you can figure out your revenue and expenses by going through your old bank and/or credit card statements. Alternatively, there are companies that can help with retroactive bookkeeping.
FAQs About Unfiled Taxes
We help a lot of people deal with unfiled taxes, and to help you out, we’ve put together answers to some of the questions we hear the most often. Don’t see your question? Then, contact us directly.
How many years can I go without filing taxes?
Theoretically, you could live your whole life without filing taxes. The IRS only requires you to file if your income is over the standard deduction or if you have a special situation, such as earning over $400 in self-employment income or owing tax on tips.
However, if you were supposed to file and you didn’t, the IRS will eventually find you. IRS collections are not the only issue you need to worry about. If you don’t file, you may not be able to get loans, buy a home, or deal with other financial essentials.
How does the IRS know that I didn’t file?
Your employer, clients, and anyone else who pays you usually send tax forms to the IRS. The IRS has a computer matching system, and the agency will know that you didn’t file if it sees income forms with your Social Security Number but doesn’t see a tax return from you.
How many years back can you file taxes?
You can file back taxes from any year, but generally, if you get behind, the IRS only requires you to file six years’ worth of taxes. If you want to claim a refund, you only have three years from the filing due date.
What is the statute of limitations for delinquent unfiled tax returns?
The IRS has unlimited time to reach out to taxpayers for unfiled returns. The statute of limitations for tax audits and assessments starts when you file your return. So if you don’t file, the clock never starts.
What happens if you don’t file taxes for 3 years?
If you don’t file taxes for three years, you will incur penalties on your account if you owe tax, and if you’re due a refund, you won’t be able to claim it. Additionally, you won’t have a tax return to use as proof of income which can make it hard to get loans or buy a home.
What are the penalties for not filing taxes for 5 years?
For every year that you didn’t file, you will incur failure-to-file and failure-to-pay penalties. Both of these penalties can get up to 25% of your balance each, but if you’re incurring both at the same time, they usually cap out at 47.5%. However, once you are 60 days late, the IRS assesses a minimum penalty of the lesser of $435 or 100% of the tax due.
That means the penalties will be at least 47.5% and potentially up to 100% of the balance owed. For instance, if you owe $100,000 over the last five years, the penalties may be nearly $50,000. The penalties can be higher if the IRS assesses that you didn’t file in an attempt to commit tax evasion. You will also incur interest on top of the penalties.
What happens if you didn’t file to commit tax evasion?
If the IRS believes that you haven’t filed because you were trying to commit tax evasion, the agency can add a fraud penalty to your account. This gets assessed at a rate of 15% per month, and it can get up to 75% of the balance. You can also face criminal charges.
What if I haven’t filed taxes in 20 years?
If you haven’t filed for a long time, the IRS generally won’t require you to file every missing return. You can usually get back on track by filing the last six years of returns. However, every year you don’t file can compromise your finances — the lack of a tax return makes it very hard to get loans or mortgages.
What if I can’t pay my taxes?
If you file and cannot afford to pay in full, you may be able to set up a payment plan, apply for an offer in compromise, or make other arrangements. Depending on the situation, you may even be able to reduce your balance through penalty abatement.
The inability to pay is one of the top reasons that people don’t file their tax returns. They’re worried about what will happen if they file and can’t pay. This is a genuine concern, but in most cases, it’s better to file than to not file. By filing, you stop the failure to file penalties from accruing on your account. You also ensure that the IRS doesn’t file an SFR against you.
Get Help With Filing Back Taxes
The most important thing is to keep moving forward. Addressing back taxes can be stressful, and if you’ve been ignoring the situation for years, it’s often hard to get started. At the Timothy S. Hart Law Group, P.C., we strive to make this process as painless and easy as possible.
We will help you figure out which returns you need to file. Then, we’ll work with you to get the documents you need to file. Finally, we will help you come up with a resolution to take care of your back taxes — the IRS has many different programs that can help taxpayers.