So you forgot to file your income taxes. It happens… time gets away and then one year turns into two, turns into a bunch. The IRS doesn’t seem to notice for a while. Then one day you get a friendly reminder that you haven’t filed
your taxes. You can bet that they’ve been noticing all along, but the odds were in your favor that they owed you money, so why rock the boat? Only now they suspect you owe them money instead so you’re on their radar. Funny how that works.
You could take this opportunity to file your missing returns and square up with the IRS. Or you could continue to put it off, ignore the follow up notices, and let them do the work for you. Yep, if you wait long enough the IRS will prepare your tax return for you. How nice! Not really, because along with that substitute return as they call it there’s a good chance you’ll get a hefty tax bill. The IRS is helpful that way, but not helpful enough to care what deductions you would have taken had you filed your return yourself.
Typically when one is at this stage with the IRS there are multiple unfiled years to be dealt with and it’s likely the tax documents are nowhere to be found. This is not the time to try to deal with the IRS yourself; there’s too much money at stake. A tax professional with a power of attorney can fairly quickly get her hands on many of the documents needed to file accurately, or at least know where to send you to get the ones she can’t.
Technically, the IRS can ask for all of your unfiled returns to be filed. But in practice, they usually only go back six years. If you owed for those years, they will still collect the unpaid tax, penalties, and interest. The flip side doesn’t work as well in your favor though. You can only claim a refund within three years of the original due date of the return. So even though you need to file that long lost return from 2012, if you were due a refund unfortunately you won’t get it, and you can’t use it to offset tax due in the subsequent years either. Best to squint when you’re signing the return so you don’t see how much you gave up by not filing. The IRS doesn’t like tear stains on the returns.
For the current year and the two immediate prior years your returns can be efiled. This is helpful especially if you are due refunds for any of those years and will need that cash to pay for years you owe. Should you add up the tax you owe for the multiple years and find you are unable to pay, you can apply for an installment agreement or, depending on your financial situation submit an Offer in Compromise to possibly reduce the tax due. Keep in mind when budgeting for what you owe that interest and penalties have been accruing and over multiple years it can double the tax bill. If you’ve been compliant up until this point, you may want to try the one time “get out of jail free” card referenced in this article.
There are cases when it will be necessary for your representative to get involved more directly with the IRS to stop collections and/or wage garnishment until the returns can be processed and make sure any credits from one year are applied accurately to the bill on the next. It can get confusing to the IRS too and sometimes it takes many months for them to sort it all out. And there are times when the IRS becomes uncooperative and takes more than a reasonable amount of time to process; that’s when it may be necessary to get a taxpayer advocate involved. A taxpayer advocate is an IRS employee charged with prodding the IRS to resolve your case when going through the normal channels hasn’t worked. Believe it or not they actually do get the job done.
Don’t forget that the IRS won’t be the only one looking for your tax returns. The state and local departments of revenue will catch on sooner rather than later as well, so best to file all the applicable returns when you file the federal ones. And once you’re caught up, stay caught up. It’s much easier in the long run.
Unraveling several years of unfiled or substitute returns can take time and effort, but it’s worth it when you can see a tax bill reduced from tens of thousands of dollars to a fraction of that. Don’t let the stress of it paralyze you; enlist the help of a professional- they find this kind of thing challenging and rewarding. I know I do. It’s fun to battle the tax dragon and win.