The financial statement review management representation letter is designed to complete managements responsibilities in the review. The letter is signed at the end of the engagement and is dated at the time of the review report. The management representation letter has three basic parts, the introduction, statements about the financials and declarations on the information management has provided.

Care should be taken in producing this letter. It contains many items that if left out, increase liability on the CPA. In addition, the standards of SSARS (Statements on Standards for Accounting and Review) require certain elements to be included.

Also, please review our Ultimate Guide to Financial Statement Review and Compilation for information on the review process from beginning to end.

If you need help with a financial statement review or audit, contact me now!

The Introduction

This section lays out the basis of the representations. Management states what has been performed, the review. They also state that matters are generally limited to items that are material in nature. The following is the standard wording provided by the American Institute of Certified Public Accountants (AICPA).

This representation letter is provided in connection with your review of the financial statements of ABC Company, which comprise the balance sheets as of December 31, 20X2 and 20X1, and the related statements of income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the financial statements, for the purpose of obtaining limited assurance as a basis for reporting whether you are aware of any material modifications that should be made to the financial statements in order for the statements to be in accordance with accounting principles generally accepted in the United States of America.

Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.

Statements About the Financials

This is one of the two sections of the document that contain the meat. In this section management takes responsibility for a number of things, it covers fair presentation according to GAAP, responsibility for internal controls and more. The following is a section form the AICPA approved wording.

1. We acknowledge our responsibility and have fulfilled our responsibilities for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America.
2. We acknowledge our responsibility and have fulfilled our responsibilities for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
3. We acknowledge our responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud.
4. Significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable.
5. Related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
6. Guarantees, whether written or oral, under which the company is contingently liable have been properly accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
7. Significant estimates and material concentrations known to management that are required to be disclosed in accordance with FASB Accounting Standards Codification (ASC) 275, Risks and Uncertainties, have been properly accounted for and disclosed in accordance with the requirements of accounting principles generally accepted in the United States of America.
8. All events occurring subsequent to the date of the financial statements and for which accounting principles generally accepted in the United States of America requires adjustment or disclosure have been properly accounted for.
9. The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole.
10. The effects of all known actual or possible litigation and claims have been accounted for and disclosed in accordance with accounting principles generally accepted in the United States of America.

Declaration of the Information Provided

Finally, management states certain things about the information it has provided during the engagement. Things such as:
We have responded fully and truthfully to all inquiries made to us by you during your review.

We have provided you with:

1. access to all information, of which we are aware, that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters
2. minutes of meetings of stockholders, directors, and committees of directors or summaries of actions of recent meetings for which minutes have not yet been prepared; additional information that you have requested from us for the purpose of the review; and unrestricted access to persons within the entity from whom you determined it necessary to obtain review evidence.
3. All transactions have been recorded in the accounting records and are reflected in the financial statements.
4. We have [no knowledge of any] [disclosed to you all information that we are aware of regarding] fraud or suspected fraud that affects the entity and involves
5. management, employees who have significant roles in internal control, or others when the fraud could have a material effect on the financial statements.
6. We have [no knowledge of any] [disclosed to you all information that we are aware of regarding] allegations of fraud, or suspected fraud, affecting the entity’s financial statements as a whole communicated by employees, former employees, analysts, regulators, or others.
7. We have no plans or intentions that may materially affect the carrying amounts or classification of assets and liabilities.
8. We have disclosed to you all known instances of noncompliance or suspected noncompliance with laws or regulations whose effects should be considered when preparing financial statements.
9. We [have disclosed to you all known actual or possible] [are not aware of any pending or threatened] litigation and claims whose effects should be considered when preparing the financial statements [and we have not consulted legal counsel concerning litigation or claims]
10. We have disclosed to you any other material liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB ASC 450, Contingencies.
11. We have disclosed to you the identity of the entity’s related parties and all the related party relationships and transactions of which we are aware.
12. We have disclosed to you all information relevant to the use of the going concern assumption in the financial statements.
13. No material losses exist (such as from obsolete inventory or purchase or sale commitments) that have not been properly accrued or disclosed in the financial statements.
14. The company has satisfactory title to all owned assets, and no liens or encumbrances on such assets exist, nor has any asset been pledged as collateral, except as disclosed to you and reported in the financial statements.
    We have complied with all aspects of contractual agreements that would have a material effect on the financial statements in the event of noncompliance.
15. We are in agreement with the adjusting journal entries that you have recommended, and they have been posted to the company’s accounts (if applicable).

In total the management representation letter sums up the company responsibilities for the engagement. It outlines the various factors taken into account during a review or audit. Care should be used when preparing this letter to assure it is in compliance with accounting regulations. Below is a link to a properly formatted financial statement review management representation letter.

Sample Management Representation Letter

The financial statement review engagement letter is designed to spell out the who, what and how of the review. It generally contains five parts: the introduction, the CPA responsibilities, the company responsibilities, the report and other matters. Like any contact it is a binding legal agreement if properly prepared.

Care should be taken when writing an engagement letter. First, it is a tool to ensure that both sides perform as specified. And if not, it can be used to enforce penalties for non-performance. Second, the engagement letter must adhere to standards of SSARS (Statements on Standards for Accounting and Review).

Also, please review our Ultimate Guide to Financial Statement Review and Compilation for information on the review process from beginning to end.

Independence

Before accepting the engagement and creating an engagement letter the CPA must determine if they have the independence needed to perform the service. As well, If during the performance of the review, the CPA determines that his independence is impaired, he should withdraw from the review engagement.

So what is independence? The American Institute of Certified Public Accountants (AICPA) defines independence as: “the state of mind that permits a member to perform an attest service without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism”.

Further, “Independence in appearance is the avoidance of circumstances that would cause a reasonable and informed third party, who has knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest engagement team is compromised”.

They can call this “plain English” all they want, but it’s still a little wonky. Let’s breakdown the first part. What they are saying is that if there is a situation that puts the CPA in a position to not properly perform without bias, it’s a problem. Things that can impair independence this way are:

The performance of certain services for the client such as acting in a management capacity, holding custody of their assets or having a close family member in a position of governance working for the client. These situations create a situation where the CPA is beholden to the company they must be independent from.

The second part uses a gauge to determine if independence is impaired. If a third-party outsider would consider the CPA to be impaired, they probably are impaired. This type of consideration is useful to give the CPA pause to step back and look at his situation from the outside.

The Engagement Letter

The Introduction

The introduction set out what will be done. It’s where the CPA explains that a financial statement review will be performed. It also provides the time frame that is being reviewed. The following from the AICPA is a standard introduction.

You have requested that we prepare the financial statements of ABC Company, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements and perform a review engagement with respect to those financial statements. We are pleased to confirm our acceptance and understanding of this engagement by means of this letter.

This section can be changed to reflect a variety of things. Perhaps the engagement is for comparative financials or is for only specific elements like only a balance sheet or all statements but with out the notes. It is key to get this section, dates and all, correct.

CPA Responsibilities

This section is actually entitled, Our Responsibilities. That is because it is being written from the perspective of the CPA firm. There are quite a few items that appear here the following is a list from the AICPA of the basics to include.

The objective of our engagement is to:

a. prepare financial statements in accordance with accounting principles generally accepted in the United States of America based on information provided by you and

b. obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements in order for the statements to be in accordance with accounting principles generally accepted in the United States of America.

We will conduct our engagement in accordance with Statements on Standards for Accounting and Review Services (SSARSs) promulgated by the Accounting and Review Services Committee of the AICPA and comply with the AICPA’s Code of Professional Conduct, including ethical principles of integrity, objectivity, professional competence, and due care.

A review engagement includes primarily applying analytical procedures to your financial data and making inquiries of company management. A review engagement is substantially less in scope than an audit engagement, the objective of which is the expression of an opinion regarding the financial statements as a whole. A review engagement does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; or other procedures ordinarily performed in an audit engagement. Accordingly, we will not express an opinion regarding the financial statements.

Our engagement cannot be relied upon to identify or disclose any financial statement misstatements, including those caused by error or fraud, or to identify or disclose any wrongdoing within the entity or noncompliance with laws and regulations. However, we will inform the appropriate level of management of any material errors and any evidence or information that comes to our attention during the performance of our review procedures that indicates fraud may have occurred. In addition, we will report to you any evidence or information that comes to our attention during the performance of our review procedures regarding noncompliance with laws and regulations that may have occurred, unless they are clearly inconsequential.

Management’s Responsibilities

This section is titled Your Responsibilities. This is due to the fact that the letter is being aimed at the company. The following is from the AICPA and is preferred language.

The engagement to be performed is conducted on the basis that you acknowledge and understand that our role is to prepare financial statements in accordance with accounting principles generally accepted in the United States of America and to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements in order for the statements to be in accordance with accounting principles generally accepted in the United States of America. You have the following overall responsibilities that are fundamental to our undertaking the engagement in accordance with SSARSs:

a. The selection of accounting principles generally accepted in the United States of America as the financial reporting framework to be applied in the preparation of the financial statements

b. The preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and the inclusion of all informative disclosures that are appropriate for accounting principles generally accepted in the United States of America

c. The design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error

d. The prevention and detection of fraud

e. To ensure that the entity complies with the laws and regulations applicable to its activities

f. The accuracy and completeness of the records, documents, explanations, and other information, including significant judgments, you provide to us for the engagement

g. To provide us with:

• access to all information of which you are aware is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters,
• additional information that we may request from you for the purpose of the review engagement,
• unrestricted access to persons within the entity of whom we determine it necessary to make inquiries

h. To provide us, at the conclusion of the engagement, with a letter that confirms certain representations made during the review.

You are also responsible for all management decisions and responsibilities, and for designating an individual with suitable skills, knowledge, and experience to oversee our preparation of your financial statements. You are responsible for evaluating the adequacy and results of services performed and accepting responsibility for such services.

In general, management of the company is responsible for the financial information and that it complies with GAAP. They are also responsible for fraud detection and prevention and to comply with laws and regulations. They have a responsibility to provide the CPA with any access necessary to complete the review. Last they need to have a person of suitable financial knowledge to oversee the financial statement review.

Our Report

This section discusses the report that will be issued with the financial statements. It also explains that the CPA does not assure that a clean (unmodified) report will be issued. It also provides an out if the CPA feels they need to withdraw from the engagement. Last it specifies what the company can and can’t do with the reviewed financials. From the AICPA this is an example wording.

We will issue a written report upon completion of our review of ABC Company’s financial statements. Our report will be addressed to the board of directors of ABC Company. We cannot provide assurance that an unmodified accountant’s review report will be issued. Circumstances may arise in which it is necessary for us to report known departures from accounting principles generally accepted in the United States of America, add an emphasis-of-matter or other matter paragraph(s), or withdraw from the engagement. If, for any reason, we are unable to complete the review of your financial statements, we will not issue a report on such statements as a result of this engagement.

You agree to include our accountant’s review report in any document containing financial statements that indicates that such financial statements have been reviewed by us and, prior to inclusion of the report, to ask our permission to do so.

Other Relevant Information

This area is designed for the CPA to insert the cost for services as well as charges for ancillary services like photo copying and other side items. They can also add legal things like how disputes are handled. Pretty much anything not covered above can be inserted here.

Attached to this post below is a copy of a financial statement review letter that I sometimes use. It is a guide that I base many letters off of. Enjoy!

Sample Financial Statement Review Engagement Letter

What can you do?

If you have 5 years of unfiled tax returns, you’re not alone. Every tax season in the US, 7 million people consider how to file past due tax returns. The problem with letting several years of non-compliance build up, where to start.

The reality of not filing your taxes is that penalties, fines, and interest could be building up. This often forces people to dig that hole deeper by ignoring the problem. This Ultimate Guide to Unfiled Tax Returns will show you how to get caught up. Whether you self-prepare or use a professional, I’ll walk you through the process.

Author:

Ernest L. Tomkiewicz CPA

 15 minute read

Format of this article:

1. The Benefits of Catching up
2. How the Past Can Hurt
3. Common Questions
4. How to File Past Due Tax Returns Pt.1
5. How to File Past Due Tax Returns Pt.2
6. How to File Past Due Tax Returns Pt.3
7. How to File Past Due Tax Returns Pt.4
8. Relief for Unfiled Tax Returns
9. Unique Situations
10. Bankruptcy and Past Due Tax Returns

In this article I am going to address many of the concerns that you face when dealing with filing past due tax returns. First, I will give you the pros and cons of what you face. Pros include things like getting back money you paid into the system or having the stress removed from your daily life. Cons like penalties, tax evasion or even whether you could go to jail for not filing, will be considered.

Potential relief measures such as IRS tax relief and offer in compromise need to be considered in your plan. Both could help you decide to finally get compliant. Time limits and statute of limitations are important to consider as well. Some determine how much and if you get a refund. Further in you will be given the steps to deal with unfiled returns and the benefits of hiring a professional to help you.

There are also unique situations that could lead to unfiled returns. Are you an expatriate with this problem? Read on to find ways to cope. You may also be dealing with a deceased person and tax returns. As you will see, this is not uncommon.

We will also discuss filing a return when you lost your documentation, or how to handle a bankruptcy and back taxes at the same time. Last, we will take a look at the problems of unfiled business tax returns and the penalties they create. If you have a partnership or non-profit this is the section you should focus on.

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The Benefits of Catching up on Years of Unfiled Tax Returns

Why should you file past due tax returns? The answer is quite simple. First, getting caught up means one less thing to worry about. With so many other problems in life, (viruses, protests, and unemployment) getting this one off the table will help you sleep better. While you can’t control the weather, you can control your tax compliance.

Second, if you are owed money, get it now before it’s too late. The reality of having unfiled tax returns is that you could be owed a refund. The statistics are clear. Right now the IRS is holding 1.4 billion dollars of unclaimed refunds, from just 2015 alone. If this is your money, go get it because the clock is ticking. Every year as the time limits for refunds expire, the IRS is gifted your money.

Third, past due tax returns affect secondary parts of your life. Consider an emergency situation where you need to immediately go and purchase a car. Like many people you will need financing. If you aren’t current on tax filing, you could have a problem. No proof of income, no loan, no car. How about the recent stimulus payments? People with unfiled tax returns are still waiting for that money. The reality is, if the IRS didn’t have your bank or mailing information, you will wait a while for stimulus money. Especially if another round comes into play.

The bottom line, do not lose your money. Nor lose sleep and add stress to life. There are many items to consider beyond just getting your returns caught up. Take it from someone that deals with this on a daily basis, get filed now. At least once a month I have someone with 3, 5 or 10 years of unfiled tax returns show up at my office. The excuses are numerous. And many are perfectly understandable. But the good news is that they have taken the first step. That step is recognizing the problem. Once you do this it becomes easy to do something about it.

One person I worked for had 6 years of past due tax returns. While she did have four with refunds, two were beyond the statute of limitations. This money was forever lost to the Department of the Treasury. The lucky thing was that the balance owed in tax and penalties on two years just about balanced out with the two refunded years. No harm, no foul. But the thousand dollars that weren’t refundable, would have been nice to have.

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Ways Past Due Tax Returns Can Hurt You

There are several ways you can be affected by not filing your taxes. First is the common question you hear from people. Will I go to jail for not filing my taxes? The easiest answer is, probably not. You have to look at the odds of actually getting caught, being convicted of tax evasion and actually getting sentenced to jail time.

The reality is those odds are extremely low. In 2015 only 1330 people were convicted of tax evasion. That doesn’t mean they all went to jail, it’s the raw number of convictions. But even if it was the total who served time, it’s still low. That same year about 140 million returns went through the system. This means a one in 239,726 or 0.0004%. This is what we statisticians call, a ghost of a chance. That’s not to say that you shouldn’t worry about it, just be aware of the reality.

What is tax evasion?

Tax evasion is a criminal act where by you don’t report or materially under report your income. Tax evasion has put some of the world’s most famous people in jail. Al Capone was prosecuted for tax evasion when the government found no other way to get him behind bars. A more recent example is Wesley Snipes. He went the route of claiming taxation was illegal or unconstitutional. Be aware that this is a non-starter. As Wesley found out, so will you if you seek this frivolous path.

Generally speaking, you won’t get brought up on tax evasion charges if you do not file your tax returns for a few years. Though that 1:239,726 does come around every so often. More likely the IRS will require that you file and pay any outstanding income tax, fines, and penalties. In some cases, the IRS will file a substitute for return (SFR). This is when they assume your income and expenses and file for you. Usually giving themselves all the leeway and you very little. It is another reason to timely file. When you allow the IRS to file for you, there is a whole new bunch of time limits and problems that arise. They are too numerous to get into, so I’ll save this for a future article.

A third and final reason to get your taxes filed are the penalties and interest. If you owe the IRS tax money, that starts accruing interest from day one. I.e. the tax filing deadline for the year in question, usually April 15^th. Add to that figure any penalties for late filing and the amount you owe grows fast. Once the IRS starts the fee train, it very rarely slows down and never stops. Even in the best-case scenario, you’re just adding to your own misery by waiting to file.

Reduce the ways unfiled tax returns can hurt you by getting caught up now. Take this article as a wake-up call. Read it thoroughly and use the advice you’re being given. These are free tips; you won’t get that from the local pricey CPA and certainly not from H & R Block.

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Common Questions for Those with Unfiled Tax Returns

Do I have to file a tax return if the IRS owes me money?

Probably not, depending on your income sources. But why would you leave that money on the table. The reality of federal tax returns is that if you have income below a certain amount, or are owed a refund, you sorta don’t need to file. Within some limits of course. And there are some side problems that could arise in that situation as well. Let’s look at some limits for filing and some potential problems with not filing a tax return.

Am I Required to File A Tax Return?

Generally speaking, if you have W-2 wages and the IRS owes you money, you do not need to file. However, income over certain limits triggers filing requirements. The same with social security income. If it’s all you have, you don’t need to file. But add in other forms of income and you may need to. If you owe income tax, that’s an automatic requirement to file.

Income from partnerships, interest, dividends and estates needs to be considered as well. In most situations if you receive any of these, you need to file. Remember, income cutoffs usually wrap all income together to determine whether you need to file.

Self-employment net income over $400 is another automatic filing trigger. As well, unreported tips need to be claimed. If you had an HSA contribution or were part of the health insurance marketplace you may have to file. As you can see there are many instances where one must file an income tax return.

What are the downfalls of not Filing a Tax Return?

First, the IRS could file a substitute for return (SFR) on your behalf. Now you are possibly facing fines penalties and taxes which you don’t even owe. Also, the time, energy, and money it takes to rectify this situation is sometimes great.

Second, if an employer miscalculated a W-2, it could have a ripple effect on your social security reported amounts. This in turn could trigger the dreaded SFR. Further you must contact the employer, the Social Security administration and more for corrections.

Third, if you don’t file, someone else could file for you. In other words, a thief could file a return with all your info and you won’t know until the IRS comes calling. This is a situation of identity theft and can spiral out of control. Once the thief has your return filed, they proceed to attack your credit and other areas. It’s often the first step taken by identity thieves. Filing early prevents these situations.

How many years Can You File Back Taxes?

The general rule is that in order to be compliant the IRS requires you to file the last six years of returns. Most of this is due to the constraints of the IRS budget. They really can only police about 6 years with their limited staff. And record retention is also an issue at the agency. This six-year time frame gives you something manageable, when considering your position. While you can file more years, for the sake of sanity, yours and the IRSs’, less is more.

Always remember, this is a guideline and the IRS can do whatever they please. For instance, if you have hidden income that equates to tens of thousands in unpaid taxes, you may have an issue. The IRS also uses a cost benefit when it comes to audits. If they think they can get a payoff by auditing you for 2010, they might.

Can I Still Get Money from Unfiled Returns?

Yes. But there are some limits. When assessing income tax, the IRS can go back as far as they wish. Even though they usually stick to the six-year rule. The story with a tax refund is different. If you are owed a refund on unfiled tax returns you have about a three-year limit. The clock runs for three years after the filing date. If you are owed money on your 2019 filing year, you have until April 15^th, 2023 to get it.

What is the Statute of Limitations on Unfiled Tax Returns?

This question starts with the realization, ‘oh no, I haven’t filed a tax return in 12 years’. This of course leads one to wonder when they are no longer responsible to file. The IRS statute of limitations on federal tax returns goes like this. Unofficially the IRS wants your last six years filed. Beyond that they are hard pressed to look back except in cases of gross understatement or fraud.

Record keeping is a little different. If you have a business, you may need to keep records further than six years. Let’s say you have a rental property that you are depreciating, keep all records for that until six tax seasons after selling the property. In an audit situation you may need to prove current items based on your records from years ago.

I Haven’t Filed a Tax Return in Years. What do I do Now?

In this situation you need to look at some of your basic concerns. Things like how many years you are behind, is there a statute of limitations, can I still get money from unfiled returns or how many years can you file back taxes. These are serious issues when you’re making decisions on how to proceed. It all begins with understanding what to do with unfiled tax returns. Lets look at the process for getting compliant.

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How to file Past Due Tax Returns

1. Determine the years

This step should be easy. But as I found out with one client, not so much. I received a call from someone who said they had several years of tax returns that needed to be filed. When asked, he wasn’t sure if it was four years or five. If you’re in this position, you need to find out exactly how many years you haven’t filed. It’s far easier to start your plan from the beginning and not a year or two into it.

Let’s say you file four years of returns, set a payment plan with the IRS and all seems well. Until that is, you realize you have two earlier years that were not filed. The first thing that could happen is the IRS might throw out your payment plan. Payment plans are based on being current with your filing. If you set up a good repayment term, you may now have to renegotiate that which becomes an additional step. Or they could just deny you outright.

Second, you face the reality of having to go back to prior years which could mess up the years already filed. Consider if you had carryover items in 2015 that weren’t brought onto your 2016 return. If 2015 is now filed it could affect the 2016 return and beyond. All of which will now need to be amended. If you can’t remember which years you didn’t file, contact the IRS to find out which years they have. Better safe than sorry.

Third, if you are using a tax preparer, they want everything in order. As well they should. Going in with grey areas sometimes will get you turned away. CPAs and tax accountants take their work seriously. The last thing they want is you returning in six months with even more unfiled returns, especially when they go back further than the work already done. The reason they don’t like this? It’s because the client will generally find a way to blame them for the problem. Or not want to pay for returns that need to be amended. The list of problems is endless.

Just remember, step one is to get your act together. It’s no one else’s job to do this but yours. Own the problem, take care of the problem.

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2. Gather and organize information

Now that you know what you need, you must get your information in one place. Reality is, you have many years of unfiled tax returns. Rare is the person who is only one year behind. Once you admit you have a problem and accept the size of it, you’re good to go. The best way to do this is take one year at a time.

Get a paper folder, and start a file on your computer, to gather info into. I prefer clients send electronic files as it cuts waste and I don’t have to return stuff they leave with me. Consider scanning all your docs to the electronic file. Then take the first past due year and gather every bit of information you need. Many tax pros have a generic list of items they ask people for. Take this list and if anything applies to you, get the document in a folder.

Label your folders by year.  Because as discussed above, we know you have more than one. Methodically get each year’s information into its folder. Try not to move from year to year. Focus on one year at a time. Work until all items are in a year before proceeding to the next.

This method ensures the most complete set of paperwork. It also will prevent you from running around later trying to find dribs and drabs of information. Hint: this is another thing tax preparers do not like. The client that keeps sending in random documents over a long period of time. The reason is that we need to know there is an end to the information train so we can finalize your return.

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3. Decide on Self-prep or Professional

This is the most important step you need to consider. If you self-file and mess things up, you will end up at a CPA’s office. If this happens during tax season, chances are your issue will not even be looked at for three months or longer. Or maybe they just send you away altogether. So do your research before going it alone.

Another word of caution. If you call random tax preparers with ‘twenty questions’, you will be disappointed every time. While we enjoy helping people, we cannot provide random advice. Not just that we are too busy, we also don’t want to get sued. We leave the phone in advice to the weekend talk shows and the charlatans…Mr. Ramsey, I’m looking in your direction.

If you decide to go it alone

Nothing spells trouble like going into something completely unprepared. Or worse, overconfident. Overconfidence will bring you back to reality in a painful way, emotionally and physically. It’s that moment you realize the IRS may not be smart. But to make up for it they created thousands of rules and regulations. Each of which was designed to confuse, confound and make the average taxpayer weep in submission. I’m not saying you shouldn’t go it alone, just be smart about it.

Do research

If you are filing a series of past due tax returns you need to do some homework. Start by getting the guide for the 1040 and reading it. This will give you an idea of whether you should go it alone or find a tax pro. If you have a generic return with W-2 income and not much else, you should be able to pull it off. Even minor items like interest and dividends aren’t too complex. Just be careful and if you have items you’re unsure of, research more.

I can’t repeat this enough. The last thing you want is to have to file an amended return. It just puts the scrutiny and pressure on you even more. Amended returns get looked at by a human, not just a machine at the IRS. This leaves you open to even more trouble. Remember that research takes time and effort. This is why so many people go to a tax professional. Just be aware of the downsides as well as the upsides when self-preparing a series of unfiled tax returns.

Filing past due tax returns online or on paper

You have a couple things to consider when it comes to sending the information to the IRS. One decision is online or paper file. Both have benefits and limitations. Some of the pros and cons are based on your preference, some on regulation and some on probabilities. So should you file 10 years of unfiled tax returns on paper or in the cloud?

Paper the pros

Filling out a paper return is easy. You print and fill in the lines. No muss, no fuss. Many people still prefer this way to operate in life. Paper is tangible, you can hold it. It’s easy to work with because you can lay out several of your unfiled tax forms on the kitchen table. I must admit, there are times when a paper trail is far easier to follow than a digital one. There’s just something about visually observing a massive amount of info in one spot.

Paper also allows you to put several versions of the same document side by side for comparison. This helps when trying to decide how to account for things. Should you expense or depreciate an asset? Well, this can be determined with a side by side comparison. In taxes there are always alternatives. These alternatives can save you money. Do not ignore them.

Paper the cons

Human errors on paper filed tax returns are the number one reason that returns are audited or changed by the IRS. This is the starkest reason for not using paper. One small mistake for 10 dollars on the first form you fill out can expand into a thousand dollar error. I’ve seen it happen, so this is not an exaggeration. The IRS reports that over 50% of paper filed returns have errors. This mean you and your unfiled tax returns will be under greater scrutiny.

Anything can happen to a paper return. You could forget to include a form or schedule. The dog could eat a few pages. Or your return could get lost in the mail. Which is the most likely result. I once had a payment that was addressed to a business in Concord New Hampshire get delivered to a residence in Andover New Hampshire. There were no similarities in the name, address or zip, but it happened. The guy mailed my letter back to me with the caption, ‘apparently the post office can’t read’. If you’re going to use the USPS, spend the money for certified mail. But even then, buyer beware.

The third downside of paper is that, you will be printing a lot of it. Self-prepared tax returns usually come with a price. Printing and reprinting new copies of forms because of mistakes. This isn’t such a problem if you don’t care about the cost of the paper and ink, or the enviro effects. However, if you want to stay clean of paper, paper filing is not the choice du jour.

Online pros

The world is your oyster when it comes to online tax filing. Whether paid or free option, you have dozens of companies ready to serve you. Businesses from Intuit to Credit Karma are offering tax preparation services. With so many options it may be hard to decide which provider to use. The only advice I can offer in this area is to do some research. Because sometimes what starts out as a free option becomes a paid one. This happens when you hit certain income limits or have forms that are not covered in the free offering.

Ease in access is a second bonus of the online option. With many of these companies you can start your return on the desktop computer at work, continue it on the laptop at home and finalize it from your phone. It doesn’t get any more convenient than that. If you enjoy the ability to file from any device, make sure to check whether your provider has this option.

The third benefit of online filing is the upgradability of many companies. Let’s say you figure that you have an easy two-page 1040 return this year. But as you start data entry you realize that you received far more documents than you remember. In this situation the program you’re using will adapt to add the required forms. From your end there is less thought input and greater accuracy.

Online cons

Some online providers only allow filing for the current tax season. If you are trying to catch up four years of unfiled returns, you may be forced into a paper option. If you have several years of returns to file, make sure ahead of time that you can wrap them all up in the same place. Otherwise you will be reentering data that would otherwise roll forward. Like your name address and other basic information.

For as many tax filing providers as there are, there are a hundred times the glitches in their programs. Not a tax season goes by that intuit or Block has thousands of returns with errors. What this means to you is, it raises your risk of being audited. In addition, common math mistakes could change a refund into a balance owed. Be aware, there is no recourse against Intuit if they screw up your return.

The last con of the online systems ties into the end of the last one. If there is any problem, you are on your own. These programs are not designed to catch common data entry errors and mistakes. You now have no human contact to help you.

Get forms

If you’ve made the decision to prepare past due tax returns on paper, you need the correct forms. Be sure to get the proper return for the proper year. DO NOT file a 2010 tax year on a 2019 tax form. Rules change and the further back, the more the rules change.

Take the massive tax changes that happened as part of the Tax Cuts and Jobs Act of 2017. Many items were changed, eliminated and some were added. If you use a 2016 Form 1040 to file your 2018 taxes, you will see a letter from the IRS in your mailbox. Even with a basic return that only contains W-2 wages.

One year at a time but file at the same time

Start with your earliest unfiled tax return and prepare one year at a time. Do not jump between years or start at the end and work backwards. This will only increase the chances of an error. Keep all your documents separate and do not even open the next years paperwork until you completely finish the prior year.

Try to get all years done and mailed at the same time. This will help you in making sure all years are done and sent in. If you send in one year then wait a month before the next, anything could go wrong. You could lose documents, forget where you left off, the possibilities are endless.

Filing all at once also helps if you need to set up a payment plan. Let’s say you file 2015 and owe a large balance due. You then set up a payment plan with the IRS. Next month you file 2016 and owe another large balance due. What you now have to do is get the other payment plan thrown out and set up a new one. This is a waste of your time. Also, you may get denied and have to pay on both simultaneously. It is far better to know the total owed for all years and set up one payment plan, at one time.

Do as much with the IRS online or mail as possible

Let me preface this paragraph with some advice. It’s the best advice you will ever receive. It could also prevent you from being a victim of identity theft. Really pay attention to the following paragraphs.

The IRS will NEVER initiate contact with you by phone or email. They will always start contact with you by regular mail. Once YOU have stared a conversation with the IRS (by phone, mail or email) they will then be able to contact you back by phone or email.

The IRS will not threaten you with jail or to seize your bank accounts in a phone or email conversation. If the IRS plans to put someone in jail, there is a lengthy and complicated process to do so. It’s so difficult that you have a higher probability of being struck by lightning twice, than being sent to jail by the IRS. Also, if they are going to seize your assets, including bank accounts, it takes time. They will contact you by mail several times prior to attempting a seizure.

If you receive an email from the IRS, when you didn’t contact them first, forward it to the IRS fraud center. If you receive an unsolicited call from someone claiming to be from the IRS, do not engage with them. Hang up and report the number to the IRS fraud center. Never provide anyone that calls you with personal information, like a social security number. OR ever give out credit card or bank information over the phone or in an email.

The bottom line

Unless you make the call, keep your private information just that, private. If you receive a call claiming to be from the IRS and want to call back, check the number on the IRS website. Never just call a random number that a stranger leaves in your voice mail. And never click on links in emails claiming to be from the IRS. Go straight to their website yourself.

Now that we have gotten the safety information out of the way, how do you deal with the IRS. Once you initiate contact with them, let them know it is okay to contact you by email or phone for the issue at hand. Remember, they will only contact you back about the matter at hand, not other issues. Every separate issue will take your first contact or there contact by regular mail. To be honest, once the process begins, regular mail and email is the easiest way to deal with them. The phone wait times are long. Sometimes the phone system may just dump you after waiting for hours.

Many of the things you need help with can be found on the IRS website. There is often no need to call. You can set up payment plans, check the status of a refund and get tax transcripts. This is very convenient and easy, so take advantage of it.

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4. If you feel over your head, get professional help

A CPA or other tax professional can relieve a lot of the stress and anxiety that comes with tax filing. Below are ways to find the best provider for these services. Also, there are statistics on the odds of an audit when you self-file. As opposed to when you have a tax pro e-file for you. Last, I will cover some things to avoid like going to h & r block for unfiled tax returns. And the pitfalls of using tax preparation at Walmart.

The best way to find a tax accountant

This is an area that is too extensive to drop into the middle of an article on income tax non-filers. I’ll bullet out a few points and you can see our full article on finding a tax accountant to fill in the gaps. Three things to consider are reviews, accessibility and fees.

Always check references when hiring any new supplier of services. This goes whether you are hiring a plumber or a CPA. Google, Bing and various other sources can provide this information. Just as well you can ask a friend or colleague.

Accessibility has changed over the last several months. Many service providers have been forced to adjust to various new ways of doing business. Try to find a CPA that was ahead of the curve. Many were forced kicking and screaming into virtual work. This is not a good provider. Look to the person that had integrated systems before this last economic turn. This is the person that is prepared ahead of time for the next twist in business.

Pricing is a big part of your interaction with any company. Many CPAs still stick to the old models of hourly pricing. The problem with this setup is that you never know what you will pay in the end. The price could keep climbing as they add on busy work that should have been avoided. Or worse upsell you into services you don’t need.

Find a CPA that can provide you a firm price based on your needs. In these instances, they will contact you if the price needs to change based on new information. Fixed pricing lets you know upfront how much you will pay and doesn’t leave it to the firm that may be padding the bill.

Using a tax professional can lower your chances of an audit by over 50%

First paper filing, which many self-filers still prefer, makes you 42 times more likely to be audited than electronic filing. Consider that 21% of paper filings are adjusted in some way by the IRS. Some receive an adjustment letter, but others get audited for this. On the other hand, electronic filing has a rate of 0.5% chance of being adjusted. A far lower probability. Now if you add in the extra security of using a tax professional for filing, your risk of audit almost disappears. By using a tax professional you reduce your odds of audit from 1 in 5 for paper filing to 1 in 84. When you think about the peace of mind this brings, it’s hard to continue self-filing.

H & R block unfiled tax returns

One of the places to avoid for most tax filing is H and R Block. They may be an old institution, but that doesn’t mean the preparer you get is seasoned. Many of the conventional chain outlets scramble to find people to prepare taxes. They are in competition with traditional firms that may be willing to pay more for talent. This leaves the chains with the bottom of the barrel in choices. The biggest complaint I’ve heard with chains: you have a “newbie” preparing taxes. Not all newcomers are poor performers. They do however lack experience which can cost you money or cause an audit. And if you are looking for a cost-effective tax preparation, look elsewhere. The national average of many chain preparers is higher than if you went elsewhere.

Tax preparation at Walmart

Another place you should view carefully is tax preparation at the local Walmart. One problem was mentioned above, the unseasoned tax preparer. Department store tax “pros” turn over quickly. The largest problem by far with this type of option can be found with a quick google search. The items sited most about these individuals is that “they didn’t listen to, or understand, my tax situation”. Don’t get caught up in this cycle of bad advice. Find a tax CPA that understands your situation and needs.

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Relief for Unfiled Tax Returns

The IRS offers many relief measures when filing old or current tax returns. Research them and be sure you know the type of relief you need. Below are a few programs the IRS offers to help taxpayers get and stay compliant.

What is an Offer in Compromise?

The IRS has a program called Offer in Compromise (OIC). It is aimed at taxpayers that cannot pay their tax liability in full. It sets out an agreement between the IRS and the taxpayer for less than is owed.

The Offer in Compromise is a process whereby the taxpayer provides the IRS with personal income and expense information. The IRS then determines if the taxpayer can repay all or part of the tax debt. If the taxpayer cannot repay the whole balance due, your offer is considered. You then enter into an agreement on the terms of pay back.

What is an IRS Installment Agreement?

Before entering into an installment agreement, it is best to catch up all unfiled tax returns. This is so that you can set up the optimal repayment plan. You can apply for an installment agreement online or with a representative at the IRS. If you are not eligible for an Offer in Compromise, this is your next step. You can payback over as many as 72 months. However, it is best to payback as quickly as you can. Interest is charged during the agreement period. Bear in mind there are some minor fees to set up an agreement.

What is Innocent Spouse Relief?

This provision of tax law grew out of the spouse being innocent (unknowing) of what their partner did on the tax filing. Let’s say the Spouse A filed a tax return and didn’t report income. Spouse B doesn’t know about this income or doesn’t realize it wasn’t reported. If the IRS catches this problem, they could take any future refund from both spouses. However, by filing innocent spouse, the IRS will allow the innocent spouse relief from payment and only seek penalty from the offender. Innocent spouse primarily gives relief from liability because of one spouse’s debt.

What is Injured Spouse Relief?

An injured spouse is one that is made to pay the back debt of a spouse or ex-spouse. In this instance Spouse A has back tax debt, or other obligation that the IRS collects for. This includes child support and student loans incurred prior to marriage. The IRS wants to take the refund due to Spouse B to cover the shortfall. Spouse B can petition the IRS to provide their share of a refund and leave Spouse A to deal with their own debt. It can become a difficult problem when seeking relief after a divorce for spousal abuse.

Keys to Compliance

The main thing to remember is that, getting compliant may take time. It will also be a bit stressful going through the process. But in the end, you will be much better off. Just be sure to get ALL back taxes caught up at once and be done with it. If you leave any unfinished business behind, it may eventually catch up with you. And only create more stress further down the road.

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Unique Situations in Tax Filing

As with anything in life, there are unique and unusual situations that we all face. With your unfiled tax returns you could fall into one, or more, of these situations. US Expatriates, Chapter 7 bankruptcy, lack of records or filing for the deceased may all play a role in your life. Below are some things to consider which could be affecting you.

US Expats and unfiled returns

If you didn’t file taxes while overseas because you thought you didn’t need to, you may be in for a surprise. Expats need to file tax returns, state and federal, for income in the US. Every year thousands of expats fall behind on tax filing. This is more due to ignorance of the law than tax evasion. If you believe that you may have ignored tax filing in the US, get compliant now. Start by researching your filing requirements. If you are unsure where to start contact us now.

Deceased Persons and Unfiled Tax Returns

Filing taxes on a deceased individual has its own set of concerns. First, are you the person that should be filing for them. Determining who has authority to file for the deceased is sometimes complex. Generally, a will should spell this out. But lacking a will it may fall to the next of kin.

Finding all the appropriate documents may be another stumbling block. If the deceased didn’t keep good records, you will be fighting blind. The best place to start is with the last filed return. This will give you insight on what documents you should be searching for. Records of bills and payments and bank accounts can help direct you as well.

Finally, determining whether you need, or want, to file an estate return should be considered. Quite often an estate return is not needed after an individual passes. But as many of us find, squabbling may force the issue. Take if from my experience, sometimes it’s better to pay the fee to wrap up even a small estate. It lessens the actions of lay about relatives looking for more than their fair share.

How to File Back Taxes Without Records

This situation comes up more often than you would think. When putting aside the information used for your unfiled tax returns, accidents happen. Whether the records are lost, damaged, stolen or thrown away, the result is the same. You have zero documentation to get your taxes filed.

Step one. Get your bank statements together. This information will be helpful creating a trail of your income and expenses. Especially helpful if you have a small business.

Step two. Contact any government agencies you may have been paid by. Social Security income, payments from state tax refunds and other payments are easy to get. Start with the items you remember receiving.

Step three. Contact banks and brokerages for interest and dividend statements. Also get copies of any stock trading transactions.

Step four. Contact employers for copies of W-2 wage statements. This is an easy step, but it may take a while for the payroll department to send you what you need.

Step five. Look for miscellaneous items of income or deduction like cash payments for services, student loan interest paid, deductions for mortgage interest and property taxes, charitable deductions, etc.

It’s a lot to consider. If possible, use a tax client organizer or new client intake form as a reference guide. These will help you stay focused and help you get everything needed.

Chapter 7 and Unfiled Tax Returns

This is a big legal area with lots of scary problems if not handled correctly. If you are facing a bankruptcy and have several years of unfiled tax returns, consult a professional. Do not go this step alone. The best place to start is a lawyer’s office. Due to the legal nature of what you are facing, they will be the most help.

The many of the options available in Chapter 7 bankruptcy that are only valid if you file your returns first. And even then, there are numerous time limits and deadlines that must be strictly adhered to. Miss a date by one day and you lose. Don’t take chances trying to navigate this one on your own.

Business Entities with Past Due Tax Returns

There are some penalties you should be aware of when you have a non-compliant business. The IRS has various penalties that will be applied to past due returns. Be familiar with them and also your options for relief of late filing penalties.

Past Due Corporate Tax Returns

The late fining penalty for a C-Corporation is 5% of the outstanding tax for up to five months. The minimum penalty is the smaller of the tax due or $135. If your corporation owes $1,000 in tax and is two months late in filing, you will owe a penalty of $100 (the lesser of $100 and $135).

Partnerships

Partnership penalties are bit more stinging. $210 for each month multiplied by the number of partners. If your return is 6 months late on a seven partner return the penalty is $8,800. Let’s get those partnership returns filed on time.

Non-profit

The penalties on a non-profit are pretty stringent as well. You pay $20 per day late. This adds up quick. Consider if you forget to file an extension for your non-profit Form 990. Four months goes by and you finally get filed. The next thing you receive will be a penalty demand for $2,400. Penalties add up fast.

One-time Abatement of Penalties

There is however relief for penalties. The One-time Abatement offered by the IRS may be available to you. Here are the qualifiers and if you meet these you may be eligible for relief. You have no tax penalties for the prior three tax years. You are current on all tax filings or are on extension of time to file. You have paid, or arranged to pay, any taxes due. For partnerships this usually includes the partners personal returns.

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Conclusion

This article covered a lot of territory. We saw the benefits of getting compliant as well how not filing can hurt you. It’s not just the direct effects, it also could lead to identity theft and losing money paid in. The statutes of limitations are clearly in the governments favor. When you consider you can only receive a refund three years back but have to pay for 6 or more years of past debt.

We also covered how to file past due returns and the steps to make that work. The pros and cons of online versus paper filing showed a stark reality of filing. That is, paper creates a substantial increase in the odds of being audited. You were shown steps and given resources to find a tax account. These steps are invaluable in life. Professional help can save you thousands in penalties and interest.

You were told about relief measures that you should take advantage of. Whether it’s innocent/injured spouse or offer in compromise, you may have options. Last we looked at special circumstances like filing as an expatriate or filing for a deceased individual. All things require special handling and present unique challenges.

The main point overall is that if you have unfiled tax returns, get compliant now. Good luck.

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Ernest L Tomkiewicz CPA has been called by some “the best affordable accountant and CPA” in New Hampshire. He has worked as an accountant and auditor for decades providing services to Massachusetts and New Hampshire. Saint Joseph’s College in Maine has conferred upon him a Master’s degree in Accountancy as part of his educational background.

His experience was broadened under the direction of Diane B Rohde CPA PLLC, where he worked for many years. Ernest has membership in the American Institute of Certified Public Accountants, the Association of Certified Fraud Examiners, the New Hampshire Society of Certified Public Accountants and the Greater Concord Chamber of Commerce.

In addition to being a certified public accountant he is also a certified fraud examiner. To learn more or subscribe to his social network, use these links: Facebook, LinkedIn, Twitter.