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:
- 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!
- If you don’t file, the IRS can prepare a Substitute for Return, without exemptions or deductions, resulting in an inflated tax obligation.
- 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.
- 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!