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.
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.
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 15th. 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.
“IRS audit rates are at an all-time low. File your old returns now!”
Ernest L. Tomkiewicz CPA
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 15th, 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.
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.
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.
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.
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.
“The IRS offers many relief options. I can help you determine the best.”
Ernest L. Tomkiewicz CPA
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.
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.
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.
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.
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