There are certain legal responsibilities every US citizen has to comply with every coming year. Filing and paying federal taxes is one that is a constant cause of stress for many. According to Forbes, about 7 million people in the USA fail to file their tax returns each year. The IRS, as a part of its National Research Program, released a study in 2011 that indicated government losses of up to $28 billion per year as a result of non-filing. The more you put off filing and paying your taxes, the greater the risk of facing consequences that are enforced by the IRS. Unfiled tax returns can really disrupt your peace and result in financial hardships. In this blog, we explore how far back you ought to worry about unfiled taxes, how to file and mistakes to avoid while filing unfiled tax returns.
1. How Safe Am I From the IRS for Unfiled Tax Returns?
Some taxpayers sitting on years of unfiled tax returns find themselves basking in a false sense of peace and safety owing to the failure by the IRS to enforce collection for an extended length of time. Most underestimate just how much time and power the IRS has to collect on a tax debt.
Understanding The IRS Statute Of Limitations
Once 10 years have passed, the IRS can no longer collect on your tax debt from unfiled taxes. What you ought to appreciate is that it isn’t as simple as it sounds. In fact, the 10-year statute of limitations on your tax debt begins only after the IRS notices the unfiled tax returns, when you file the unfiled return, or when the IRS does it for you.
This means that even after the passage of 10 years since you forgot to file your taxes, the IRS can still come after you. Plus, once the 10-year time frame starts running, lack of action instantly exposes you to penalties. There are also many situations that can restart the clock on the statute of limitations. These include filing for an appeal, OIC, or bankruptcy, and signing a waiver. In any of these circumstances, the 10-year clock automatically restarts.
2. Should I Worry About Old Unfiled Tax Returns as a Tax Problem?
In short: Yes! Not only does failing to file your taxes expose you to penalties, both civil and criminal, it also attracts many other severe IRS tax problems.
- First of all, by not filing, you allow the IRS to file your taxes for you in the form of substitute tax returns. When this happens, the IRS will file as if you’re single with no dependents. Therefore, no deductions will be made, which will most likely see your tax debt being exponentially higher.
- Unfiled tax returns for years may also exclude you from getting tax refunds. Since the IRS doesn’t allow taxpayers to collect tax refunds older than three years, by not filing your taxes for longer than that, you effectively lose claim to refunds from the same period. The money will go straight to the US Treasury.
- Additionally, unfiled tax returns prevent you from being accurately credited for the missing tax years. In the long run, this can impact you when it comes to the collection of social security and medical benefits.
Common Questions Related to Filing Unfiled Tax Returns
Let’s answer some common questions about filing unfiled tax returns and the penalties for failing to do so. Read on!
1. When Do Unfiled Tax Returns Become Criminal?
The willful failure by taxpayers to file tax returns is a misdemeanor according to Internal Revenue Code (IRC) § 7203. People facing this charge can be punished by up to one year in jail and a fine of as much as $25,000. Besides, taxpayers who fail to file returns multiple times may be guilty of an overt act of evasion and punished for the felony under IRC § 7201.
2. What are the Penalties for Late Filing?
If a taxpayer fails to file a tax return, they may have to pay a late filing penalty of five percent of the total tax amount due per month. This penalty is not a one-time computation and is added for each month if a taxpayer delays in filing unfiled tax returns for up to five months. Even in the event that taxpayers can’t pay their taxes, they still need to file to qualify for an installment payment program.
3. What are the Penalties for Failing to Pay My Taxes?
In addition to the late filing penalty, taxpayers who have unfiled tax returns are also subject to a failure-to-pay penalty of five percent per month, up to five months. This penalty adds up significantly when combined with compounded interest, other penalties, and even interest on the penalties.
4. When Does the IRS File a Substitute Return?
When taxpayers fail to file their federal tax returns for a while, Sec 6020 authorizes the IRS to prepare a substitute tax return for the concerned taxpayer based on available information such as Form W-2, Form 1099-INT, Form 1099-DIV, Wage and Tax Statement, Interest Income, and Dividends and Distributions issued to the taxpayer.
5. What Efforts does the IRS Invest in Tax Collection ?
The IRS can garnish taxpayers wages, seize their personal property, levy their bank accounts and other investments, and file a tax lien on their real estate to collect outstanding taxes.
Things to Keep in Mind When Filing Unfiled Tax Returns
• Collate all Documents
The first step to file unfiled tax returns is collating all the necessary information and documents. If needed, you can also request the IRS for a few important transcripts, such as income, account, and wage documents, that you may need when filing unfiled tax returns. It is also essential to collate all documents related to investments, self-employment, and other income that were not documented in the IRS file.
• Complete the Filing Process
After you collate the necessary documents, compile them properly and complete filing your tax return accurately. Make sure you double-check the tax return against all the documents you present to the IRS. Reviewing and double-checking your tax return makes sure that you avoid missing out on even the smallest financial detail when filing unfiled tax returns.
Tax Relief Options You Can Explore
Some taxpayers don’t have the finances to pay what they owe to the IRS. In such cases, the IRS offers a number of tax relief options, provided the taxpayer can provide relevant documents to prove their claim. Two common ways to get tax relief are:
Offer in Compromise
An Offer In Compromise is the best option for individuals with very low income and minimal or no equity assets. The Offer in Compromise is a lump sum amount that is submitted to the IRS in hopes that they accept this amount and forgive the taxes due.
Another way out offered by the IRS is to pay the owed tax amount in installments. There are, however, certain eligibility criteria that taxpayers need to qualify to receive this plan. Moreover, when opting for an installment plan, it is crucial to always meet the subsequent payment deadlines to avoid high penalties.
If you are confused as to whether you can take advantage of the tax relief options, consult a reputable tax relief attorney near you.
Mistakes To Avoid While Filing Unfiled Tax Returns
Making mistakes when filing unfiled tax returns isn’t something to avoid at all costs. Erroneous tax returns have real consequences. A simple mistake can lead to a higher amount of outstanding taxes or penalties and interest. Some mistakes in unfiled tax returns can even keep you from receiving a full tax refund. In some cases, inaccuracies in your return will motivate the IRS to carry out an audit. Here are 5 mistakes to avoid when filing unfiled tax returns.
1. Mindless Mistakes On Your Basic Information
Probably the easiest mistakes to avoid when filing your unfiled tax return, mindless mistakes can be avoided by simply verifying your general information. Make sure your name and social security number are reported correctly. Check for spelling mistakes and typos.
It is also important that you select your filing status correctly in your tax return. Depending on your situation, filing under an unfavorable status may end up costing you money. Take a good look at all options to determine the status for which you are eligible and the best way to file.
2. Not Reporting Information Exactly How It Is Reported To The IRS
Information return forms such as Form W-2, 1099, AND K-1 should be examined carefully. The information in your tax return should always match the data reported on these forms. Make sure all reported income including your wages and bank interest match the information entered in your report. If you identify a mistake on your information return forms, request a correction rather than simply entering the correct amount on your return.
3. Not Taking Every Write-off You’re Entitled To
There are several circumstances that can warrant a tax deduction. However, many taxpayers miss out on such deductions by not making the right claims in their unfiled tax returns. The main reason is fear that claiming certain tax deductions might motivate the IRS to audit, which is not true. If you meet legal requirements for a deduction, it is advisable to take it. By not taking advantage of legitimate expense write-offs, you also miss out on tax savings.
4. Always Taking The Standard Deduction
Automatically selecting the standard deduction on your tax return can cost you money. Even if it seems like the easiest route to take, taking the time to itemize the deduction is worth the effort. Before you file unfiled tax returns, make sure you explore every option in detail. If the standard deduction seems best at the end, you can then safely proceed to select it.
5. Not Verifying Your Payments Are Credited To You
Being responsible with your tax payments is no good if they aren’t actually credited against your tax debt. When filing your tax return, make sure you include the right forms along with the payment.
Carefully filing your unfiled tax returns is the best way to prevent tax problems with the IRS. Getting professional unfiled tax return help is one way to make sure your unfiled tax returns are free from any major mistakes.
Should I seek professional help with unfiled tax?
If you haven’t filed your taxes, the best thing you can do is file and pay as soon as possible. Even if a substitute return has been filed in your name, you can still act through an amended tax return. Professional tax help really goes a long way to bring out the desired result when in such situations. The more you neglect filing your tax returns, the more consequences you can face. Levies, liens, collecting directly from your salary or savings, seizing assets or investment dividends, etc. are all real possibilities. Once the IRS has noticed your unfiled taxes and sets out to collect, there’s little you can do to get it off your back. It is best to seek consultation with a professional tax problem resolutions lawyer.
File Your Unfiled Tax Returns With Nick Nemmeth’s Law Offices!
Nick Nemmeth’s tax attorneys are experts at helping taxpayers solve tax problems with unfiled tax returns. We give you the best advice on your specific circumstances and guide you through the entire process. If avoiding penalties by filing your unfiled tax returns successfully is your goal, consulting with a tax law attorney is key! Call us at (972) 426-2991 for a free consultation of your unfiled tax returns case or any other tax concerns.