How Far Can The IRS Come After You For Unfiled Taxes? Things You Should KnowPersonal Taxes
In an ideal world, everyone should file their taxes on time, but the world we live in is less than perfect. So, you’re not alone if, for whatever reason, you failed to file taxes for one or more tax years.
At one point, you’ll probably start wondering. How far can the IRS come after you for unfiled taxes? The reality is that the law permits the IRS to go as far back as they deem necessary, and they can request taxes you missed paying decades ago.
This rarely happens as, in most cases, the IRS only looks at the last six years and assesses taxes and penalties for any delinquent returns during this period.
We’ll look at what you should know about unfiled taxes to help you be ready if the IRS comes after you.
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Statute of Limitations on Unfiled Taxes
One of the most important implications of failing to file a tax return is that the statute of limitations can’t start. As a result, the IRS can go back indefinitely and review your unfiled taxes from twenty or thirty years ago.
The IRS rarely looks for delinquent returns so far back unless they determine the taxpayer has a considerable tax debt. The agency usually looks at your returns for the last six years and takes steps to collect the existing liability.
When you file a delinquent return, and eventually you’ll be forced to, or the IRS will do it for you, you’ll set off a three-year tax assessment statute of limitations. The IRS must assess the amount you owe during this period and complete the audit of your account.
Moreover, you’ll forfeit your right to a tax refund if you don’t file a tax return three years after its original due date. The statute of limitations for tax collection is ten years, but before the IRS can collect a debt, the agency must first assess the tax liability.
They can only do this after a tax return is filed, so if a taxpayer doesn’t file a return, the agency can file a substitute for the return. This triggers the statute of limitations for tax collection and enables the IRS to collect the debt from you forcibly.
It’s worth adding that there’s no statute of limitations for civil tax fraud on unfiled taxes, while the IRS has between three and six years after a return is filed to bring criminal charges.
Ramifications of Failing to File Taxes on Time
The financial burden of unfiled taxes is substantial. Aside from paying the federal tax amount you originally owed, you’ll also have to cover additional penalties.
Here are some of the consequences non-filers face:
A 5% penalty of your tax debt amount will be assessed to your account if you don’t file a return. This monthly penalty increases gradually and can balloon up to 25% of the balance due.
In addition, the IRS assesses accuracy-related (20% of the understated amount) and failure-to-pay penalties (0.5% – 25% of the taxes due).
The amount you’ll owe to the federal government won’t just be increased by the penalties the IRS assesses to your account. The interest accrual starts from the moment taxes are due, usually the filing deadline, until the liability is paid in full.
The interest rate is adjusted quarterly, comprising the federal short-term rate plus 3%.
Forfeiting a Tax Refund
The IRS will keep your tax refund if you don’t file a return for a particular tax year three years after the filing deadline. The deadline for filing taxes is usually April 15 unless the date falls on the weekend, in which case the deadline is the next workday.
You’ll be able to get a refund for a return that was due on April 18, 2023, if you file the return before April 18, 2026.
Also, securing a mortgage with unfiled taxes or other types of loans can be difficult because most lenders review tax returns when approving loans.
What is a Substitute For Return?
The chances of slipping under the IRS’ radar after failing to file a tax return are slim. The agency reviews all forms and documents with your SSN occasionally, and sooner or later, they will notice you missed filing taxes.
Even so, the IRS sometimes needs several years to notice that you have unfiled taxes for one or more years.
Once you pop up on their radar, the IRS will send you a series of notices urging you to file returns for the years in question and pay taxes. Notice CP59 is the first letter you’ll get from the IRS, followed by CP515, CP516, and CP518 notices.
The purpose of filing taxes is to enable the IRS to assess how much you owe for a specific year. If you don’t file taxes, the IRS will file a substitute for return for you so that they can calculate the amount you owe.
The IRS uses the information it gathers from W2, 1099-K, 1099-NEC, and other forms it receives from third parties when filing an SFR. The SFR will include standard deductions but won’t factor in tax credits or dependents, and your filing status will be Single by default.
Consequently, your tax liability will be much higher than it would be if you file a tax return voluntarily.
What to Do If You Get SFR From The IRS?
You’ll have several options after you receive an SFR from the IRS. You might be able to explain that you were exempt from filing taxes in a letter to the IRS if your taxable income for that year was lower than the standard deduction.
The best action is filing a tax return with a correctly calculated tax liability that includes all credits and deductions you can claim within thirty days after receiving SFR.
Optionally, you can sign Form 870 Consent to Assessment and Collection if you agree with the tax liability the IRS charged to your account.
You’ll get a Notice of Deficiency from the IRS if you don’t respond to the SFR in thirty days, informing you of the amount you owe and your appeal rights.
The agency will initiate the collection process 90 days after mailing this letter to you and, depending on the case, place a tax lien or seize your property.
Filing Delinquent Returns
The most challenging part of filing a delinquent return is gathering all the necessary documents since you may not be able to locate old W2s or 1099s and other documents you need to file taxes.
These documents could be available on your IRS account, and you can request their copies on the IRS website. Old tax return transcripts, as well as wage and income transcripts, are also obtainable through the IRS website, or you can request their paper version with Form 4506-T.
Your business associates or previous employers can help you gather the necessary documents because they may still keep the forms they issued to you on their records.
The filing process is straightforward as you need to obtain 1040 forms for the years in question, fill them out and send them to the IRS.
Exploring Payment Options
The IRS doesn’t expect you to pay the entire tax debt at once and allows you to choose the payment method that works best for you. Moreover, you might be able to apply for penalty abatement if you file all delinquent returns simultaneously.
These options are available to non-filers with tax liability they cannot pay in full:
- Installment Agreement: A taxpayer can set up a monthly payment plan for the entire tax debt amount.
- Partial Payment Agreement: This agreement enables taxpayers to pay a portion of the debt due to financial hardship.
- Currently Not Collectible Status: Obtaining this status can postpone the collection process.
- Offer in Compromise: Applying for an Offer in Compromise can reduce your tax liability, but you must meet specific criteria to apply for this payment plan.
Entering an installment agreement is the most common resolution of a tax debt issue because the IRS is unlikely to approve other payment options if you can’t present strong evidence of financial hardship.
Frequently Asked Questions
Most non-filers pay substantial penalties for unfiled taxes but rarely face criminal charges. That said, taxpayers who commit tax fraud might face jail time.
Yes, unfiled taxes are a major issue even if you’re a full-time employee and your employer pays payroll taxes regularly because you’ll have to pay considerable interest and penalties.
The issue is even more severe for independent contractors since the IRS might calculate their tax liability based on a single Form 1099.
The Federal Payment Levy Program allows the IRS to take 15% of your social security if you owe back taxes.
The time you have to pay your tax liability depends on your agreement with the IRS and can vary from 120 days to six years.
Sorting Out Unfiled Taxes to Avoid The IRS Coming After You
Trying to postpone or avoid filing back taxes isn’t a viable strategy because the IRS can file SFR and increase your tax liability.
The IRS can come after you for unfiled taxes regardless of how much time has passed since the return was due, as there’s no statute of limitations on late tax returns.
So, the longer you wait, the larger your tax bill will be. Taking the initiative and filing all missing returns will improve your chances of reaching an agreement with the IRS that will allow you to pay off your debt in installments.
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.