How Far Back Can the IRS Go for Unfiled Taxes?

How far back can the IRS go

How far back can the IRS go for unfiled taxes?

And what can you do to resolve the problem, should you find yourself behind on your tax filings (or tax payments)?

First, the good news. Federal law protects taxpayers who are in trouble with the Internal Revenue Service by setting a statute of limitations for the collection of unpaid taxes.  Title 26 of the United States Code, Section 6502, sets a 10 year time limit for collection of back taxes.

Now the bad news.  Many taxpayers misinterpret this law. They assume that any balance due on a return that should have been filed 10 years ago is now outside the statute, and that the IRS can no longer continue collection efforts. This interpretation is incorrect.

There is a 10 year statute of limitations on collections. But that 10 year period does not begin until taxes are actually assessed. And taxes are not actually assessed until a return is filed—either filed by you, or prepared and filed for you by the IRS.

The IRS May Have Filed a Substitute Return

If you do not file your return for a particular year, the IRS could prepare a substitute for return (or “SFR”), and then assess your tax due. Congress authorizes the IRS to do this. (IRC 6020),

How do you know whether a substitute return has been prepared? Usually you’ll find out when you receive an Assessment Letter in the mail from the IRS. Here’s an example of what the standard Assessment Letter (IRS Notice CP2566) looks like.

The letter tells you that

(a.) the IRS has not received your tax return, and

(b.) you have 30 days to file, or

(c.) the IRS will prepare a return for you and assess tax due.,

Typically the IRS will mail out this letter when it notices that a person hasn’t filed for a few years, but at the same time the agency has received income documents such as W-2 and 1099 forms for that person. In other words, your employer or someone who has paid you for services was required to report that income to the IRS via Form(s) W-2 and/or 1099-Misc.

A Substitute Return is Prepared in the Best Interests of Uncle Sam

The Internal Revenue Service knows that you earned income, and knows you haven’t filed a return. So they prepared a return for you, but when they did, they didn’t do you any favors. They didn’t give you any of the normal deductions or credits that you would have included, had you prepared the return. The SFR assumes you are a single person (or married filing separately) with no dependents, no business expenses, no itemized deductions, and so on.

So if you receive an Assessment Letter (CP2566), your best course of action is to file an amended return, including any legal exemptions, deductions and tax credits you are entitled to, within 30 days. You’ll likely find your tax bill is significantly reduced by filing a return.

You may even discover that the IRS owes you a refund! Note however, there’s a statute of limitations on refunds. The IRS doesn’t have to refund you any overpayment of tax if the return is not filed within 3 years of the filing deadline.

What if you do nothing?

If you don’t file an amended return, or you simply don’t respond to the assessment letter within 30 days, then IRS mails out a second letter, called the Statutory Notice of Deficiency. This one comes by certified mail, which requires that you sign to receive the letter. Here’s an example of what the Notice of Deficiency (IRS Notice CP 3219N) looks like.

 At this point the IRS is prepared to move forward as if their proposed tax assessment (detailed in the first Assessment Letter) is correct, and is ready to initiate collection action for any unpaid tax, penalties, and interest.

 The Deficiency Notice gives you 90 days to respond; be sure to read it carefully. You’ve got two choices at this point:

  • If you agree with the notice, respond by filing a Consent to Assessment and Collection
  • If you disagree, you either (a.) go ahead and get that missing return prepared and filed, or (b.) dispute the assessment and/or filing requirement through Tax Court.

What if you have not received either of these two notices?

Let’s assume that you haven’t filed your personal 1040 tax returns for say 2, 5, or even 10  years. But after all this time, you now find yourself in the position where you really need to address the issue. It could be a new marriage, a new job, or the threat of having your passport revoked, for example.

Whatever the case, waiting or doing nothing can only make the matter worse, for several reasons:

  1. Not filing your tax returns is a crime that can put you in jail. While the IRS doesn’t take this action often, they do so—as they did with Wesley Snipes. Not paying taxes can bring civil charges, but not filing can bring criminal charges, which makes not filing worse than not paying!
  2. If you don’t file, the IRS can prepare a Substitute for Return, without exemptions or deductions, resulting in an inflated tax obligation.
  3. Not filing means you lose possible refunds due to the 3 year statute of limitations. This means you lose money, or you lose the ability to use any refund amounts to offset the tax due on other un-filed years.
  4. The IRS may have sent notices, but you’ve not received them  because your address has changed over the years. But they still can locate your bank account, or your employment, and should they levy your account or garnish your wages, it will be very difficult to stop the collection action until you get your returns filed.

Bottom line, waiting for the IRS can backfire on you.

It really is possible to put your tax problem behind you, but first you have to decide that you’re going to start.

What if you file, but can’t afford to pay the tax?

Even if you find that you owe the IRS, you should still file the returns for the reasons stated above.

You may not have the money to pay the tax right now—but you do have options. This could actually be the best time to work out a settlement with the IRS, and not in the future, whenever you “get back on your feet” and actually have money.

The only way to settle your debt is by first filing a tax return, so that the IRS can make an assessment of tax due.   

What if you don’t have past year’s records; how can you file a return?

Many taxpayers misplace prior year tax records, even lose them in a flood or a fire. Maybe record-keeping isn’t your strong suit to begin with, and now that you’ve behind with the IRS, the thought of organizing your paperwork and preparing a return is simply overwhelming.

But there is hope. W-2s, 1099s, 1098s, K-1s, etc. are all going to be on your IRS records; you can access all of this info by requesting a report from the IRS called a Wage and Income Transcript. Obtain a transcript for each year you’ve not filed — up to 6 years.

In most cases, because of limited manpower, the IRS requires you to only go back and file your last 6 years of returns, and then work out a payment arrangement or settlement for any tax due. This is the general rule, and there are exceptions, but working to prepare and file 6 years of returns can certainly be more manageable than you’ve feared.

Bottom line, you do not have to be in a state of fear and inaction due to un-filed returns and back taxes. If you just start moving forward, you’ll find it really is possible to put your IRS problem behind you, permanently. 

But the single most important step you can take to resolving your back tax problem is to act immediately.

Are you ready to get started?  Click here to set up your personalized Tax Debt Relief Consult. Bu please don’t wait; the IRS acts fast when they think you have their money!

I’m Having Financial Hardship. Can I Get the IRS Collectors to Stop?

Hard-working, well-meaning taxpayers can fall into trouble with the IRS due to circumstances beyond their control. They suffer a serious illness, or lose their job, or a poor economy hits their business, leaving them without funds to pay their taxes on time.

If you’re experiencing financial hardship, it is possible to get the IRS to agree to stop it’s collection activities. A primary means to achieve this is known as “Currently Not Collectible” status. The tax term “currently not collectible” refers to the fact that a taxpayer simply does not have the ability to pay his or her taxes.

A Personal Story

Perhaps you can relate to the situation Stan and Jill faced. Stan worked for several years in IT, but lost his job during the family-829308_12802009 recession. He was out of work for months, falling behind on his mortgage, and using credit cards to put food on the table. The increased stress caused his rheumatoid arthritis to flare up, resulting in unpaid medical bills. He finally landed temporary work on a “1099” basis as an independent contractor, helping the family get caught up on some bills. But when tax time came, he was unprepared for the additional taxes of ‘self-employment’. He couldn’t pay it all on time, got hit with interest and penalties, and all this over a 5 year period has now grown to a total IRS debt of just under $30,000.

What does a taxpayer do to fix this situation?

In working with Stan and Jill, we determined that Currently Not Collectible (CNC) status is the most appropriate solution for their specific situation. CNC status puts IRS collection efforts on hold. It protects you from bank levies, wage garnishments, threatening letters and collection enforcement.

Where do you begin to obtain CNC status? You start by providing the IRS with personal financial information that documents your hardship. The Collection Information Statement includes your bank accounts, financial assets, monthly income and expenses.

In the case of expenses, the IRS has set standard amounts for monthly food, clothing, housing, and vehicle expenses. If you are above these amounts the IRS will not consider the extra expense and instead ask that you adjust your lifestyle to within the set standards.

For this reason, it can be to your advantage to seek professional IRS Representation from an Enrolled Agent who is (1.) familiar with IRS standards and (2.)  has been successful in obtaining CNC status for other taxpayers going through financial hardship.

Is this a permanent solution–or just temporary?

To the IRS, currently not collectible is “putting a debt on the shelf”. In other words, they take your case out of their active collection inventory (shelving it). But it’s not a permanent solution; you will typically be required to resubmit updated financial information every two years, at which time your status will be re-evaluated.

In many cases, however, taxpayers who have been granted non-collectible status remain there until the time frame the IRS has to collect (10 years) expires, after which the IRS debt is permanently removed and forgiven.

ANCHOR ON THIS: Currently Not Collectible status puts IRS collection activity temporarily on “hold”, and allows you to live your life without IRS intrusions into your bank accounts, wages and property.  But when combined with the expiration of the 10 year statute of limitations on collection, it can become a legitimate action plan toward put your IRS problem behind you, permanently.

For more information, see, or contact a tax relief professional.


How to Set up Your Business Right to Reduce Uncle Sam’s Tax Bite

How to setup your business

Starting up a new business is exciting. Its a time when owners naturally focus their attention on getting customers, growing revenue and building cash flow. But the IRS will take a big bite out of the income you generate if you don’t set up your business to reduce Uncle Sam’s tax bite.

You’ll want a solid plan right from the start to deal with Self Employment tax.

If you’re like most new business owners, you’ll take the path of least resistance when it comes to structuring your business from a tax perspective. That is, you operate as a Sole Proprietorship. That can be a big mistake. “Sole props” subject themselves to the full burden of Self-Employment Tax, which is 15 cents of tax on every $1.00 of net income that your business earns. That’s on top of Income Tax, which will add another 10, 15, even 25 cents of tax on every $1.00 of net income. Put together, these two taxes can add up to as much as 40% in taxes on your Form 1040 due next April 15th.

How do you reduce Uncle Sam’s tax bite?  You do so by pro-actively structuring your business tax-wise.

Most startups don’t realize that you become a “sole proprietor” by default. It’s the legal entity structure given to you if don’t otherwise form a Limited Liability Company or incorporate when you launch your business.

Some new business owners immediately pull back at the idea of incorporating. “I’m not big enough to incorporate… I’m just starting out… I’m not that profitable”, and so on. That’s stinking thinking; it isn’t true, and it holds them back from properly setting up their business to reduce taxes right from the jump.

So lets de-mystify a couple of the more popular choices:

Limited Liabilty Company (LLC). In recent years, LLCs have become increasingly popular. They are easy to set up, and not expensive to maintain in terms of your time or your money. Legally, an LLC does just what it’s name implies: it legally shields your personal assets (your home, your IRA, your jewelry, etc) from the risks of operating a business in today’s lawsuit-happy society.

But LLC owners are technically ‘self-employed’ as defined by the IRS tax code, so this choice still leaves you exposed to Self-Employment Tax (which is basically just another term used to describe the Social Security and Medicare taxes you have to pay when you own your own business and have no one deducting these taxes from your compensation).

S Corporation. Created under Subchapter S of Chapter 1 of the Internal Revenue Code of the United States, S corporations are a separate legal person from the owner/employee. Unlike a regular C Corporation, an S corporation is a “pass-Through” entity. That is, the net  income (or net loss) of the business is passed on to the individual owners via a Form K-1. The benefit to you is your personal exemptions and deductions can be used to reduce your tax liability arising from the S Corp income.

An S Corp can actually pay you in two ways; (1.) as an employee via a W-2, and (2.) as the owner via the K-1.

As I tell my tax clients, you wear two hats as the owner/employee of an S Corp.

  • When you wear your employee hat, and do the work of the business, you are paid ‘reasonable compensation’, as would any other employee doing the same work. The corporation in this case is liable for payroll taxes –Social Security and Medicare included– on each dollar you are paid as a corporate employee.
  • But you also wear a shareholder or owner hat, and any profit earned by the business over and above your employee wages is not subject to Self Employment tax. You’re subject to increased payroll tax, but subject to less tax on your Form 1040 income tax return. The trade off can save you thousands of dollars each year.

Actual tax savings will vary, and depend on your individual circumstances. Sit down with a small business accountant and/or an attorney to determine what legal structure is best suited to your situation, and will help you achieve your objectives, from both a legal and a tax perspective.

Anchor on This:  Set up your business right–right from the start–with a proper legal entity structure designed to reduce Uncle Sam’s tax bite.  You’ll save on your business taxes when you do. And a tax dollar saved is way more than a dollar earned!