Category: How to File Back Taxes

How to File Back Taxes posts help ‘non-filers’ learn about the statute of limitations for tax debt; and offer hope, options, and strategies for filing back taxes with the least pain, and at the lowest cost. Read on if you’ve said,

“I work but haven’t filed income taxes in many years.”

“I have unfiled taxes from 2017, but no worries… I’m owed a refund.”

“I wonder if the Fresh Start program is for me”

“Can I file back taxes without records?”

The Long-Time Non-Filer: Issues to Consider

It’s nice to feel wanted until you find out it’s the IRS that wants you. If you haven’t filed your taxes for some years, The IRS has launched a new program to identify and collect from non-filers who owe $100,000 or more. If this is you, here’s what you need to know:

Big Time Penalties

You’re looking at a minimum of 25% in failure-to-file penalties. For example, if you owe $100,000, that’s an extra $25,000. Let it go too long, and you could face a 100% civil fraud penalty, effectively doubling your debt.

Missing Out on Refunds and Credits

If the IRS owes you money, you have just three years to claim it. After that, it’s gone. Plus, you’re missing out on tax credits that could lower your tax bill or even result in a refund.

Impact on Social Security and Loans

Not reporting your income affects your future Social Security benefits, potentially lowering what you receive when you retire. Also, good luck getting a loan or mortgage—lenders want to see your recent tax returns.

IRS Actions

The IRS can file a return for you, but it won’t include any deductions or credits you might qualify for, so you’ll owe more. They can also place liens on your property or garnish your wages.

How to Fix It

If you haven’t filed for many years, the problem might seem insurmountable, but maybe not. The Internal Revenue Manual has a special just for you. You are only required to file the last 6 years of returns. Voluntarily filing those 6 years will almost certainly remove the possibility of criminal actions and the civil fraud penalty. Can’t pay it all at once? An Installment Agreement lets you pay over time. If things are really tough, you might qualify for an Offer in Compromise to settle for less than you owe.

Get Professional Help

This can be complicated, so consider getting help from a tax professional or attorney. They can guide you through the process and deal with the IRS for you. It’s always safer to have someone else do the talking with the IRS for you.

The Criminal Factor

Ignoring this problem can lead to criminal charges. By acting now, you show good faith, which can help if things get serious.

In short, dealing with years of unfiled taxes is tough but doable. Take action now, get some help, and you can get back on track and breathe easier.

The Pros & Cons of IRS Voluntary Disclosure for Nonfilers

The IRS has been building a list of millions of nonfilers who have significant income. The names on this list have been prioritized and their people are starting to work on those cases. One of the options for someone who thinks their time is running out is the Voluntary Disclosure Practice.

The idea here is that by making disclosures before the IRS catches up with you, you demonstrate your goodwill by coming clean. This saves the government investigation time and money. There are two steps to the process. First, you need to make sure that an investigation is not already underway. This is called ‘Preclearance’ and takes 4 to 8 months before you receive an IRS letter welcoming you to the program or not. Once you have your preclearance letter in hand the next step is the actual disclosure followed by making arrangements to pay the taxes and penalties due.

The Pros of joining the program:

- Acceptance means jail time is most likely out.
- Penalties can be negotiated down.

There are some Cons to think about also:

- You must tell them everything and cooperate fully. Messing this up will result in you having provided evidence to the IRS to be used against you in a likely criminal case.
- Nonfilers with illegal income, even if legal under state law, are not eligible to participate.

How to Get Back into the Tax System without going to Jail

The common scenario is somebody who has not filed for years but finds themselves wishing they had. Perhaps they have seen articles about the IRS’s claim to have identified millions of non-filers with significant income. Or maybe they realize that in this world of interconnected databases there is simply no place to hide.

Whatever their reasoning, the next question is “how do I get back into the tax system without invoking a criminal investigation?” There are three approaches to consider:

1. Simply start filing and hope enough time goes by that the non-filing periods drop off the IRS radar.
2. Then there is the “Quiet Disclosure” technique. Basically, you prepare returns for the last three years and mail them in separately every week or two, hopefully with a check. The idea here is that no one return processor will connect the dots that something significant is happening.
3. Finally, there is Voluntary Disclosure. You file a letter with the IRS requesting preclearance for voluntary disclosure. The preclearance process is so that the IRS can check their records to determine if you are already under investigation and not eligible for the “Voluntary Disclosure” process. Once you are cleared to proceed, you confess all and begin negotiating the penalties without fear of criminal actions.

Which is the right approach? Depends upon the situation and money owed. Acceptance into the Voluntary Disclosure Program is the safest approach if you owe lots and a criminal investigation is likely. Run-of-the-mill cases are usually safe with the Quiet Disclosure approach.

Non-Filers and Refunds – You will be Sorry

Lots of Non-Filers are not out to rip off the IRS. They figure they have a refund, so the due date is not important to them. After all, the penalties for late filing are all based on the amount owed to the IRS. Late filing turns into a habit and many times that delay turns into years.

Here is the catch. You only have three years from the due date of the return to file and claim your refund. Once the three years are up, too bad. I know of cases where this has happened to the tune of tens of thousands of dollars. Many times, somebody will have a big year and find out they owe, but it is too late to use the prior year’s refunds to offset that liability.

Unless your intention is to make a voluntary contribution to the US Treasury, file the return. The IRS does not have the power to fix this, once the three years are gone.

Are you required to Correct a Substitute for Return?

The taxpayer refuses to file a return. The IRS records of 1099s and W-2s show that the taxpayer probably owes taxes, so they file a return for the taxpayer. This is called a ‘Substitute for Return’ and it is a legitimate tax return for all legal purposes.

Eventually, as the pressure from the IRS grows, the taxpayer realizes that the easiest path in life is to get into compliance. They prepare the missing returns and discover that their calculations show a higher tax than the IRS’s assessment. Are they required to correct the IRS? If they fail to do so, are they open to a fraud charge?

The answer is NO! The IRS has made a legal assessment. If the lower amount is what the government wants to use, the taxpayer’s only legal requirement is to pay the tax assessed. You are only in trouble if you provide false information to the government. The fact that 3^rd parties did not report all of your income is not your problem.

Are You One of the 7M Non-Filers?

Are you among an estimated 7 million ‘non-filers’ in the USA? If you are, I’ll share bad news and good news. But first let’s look at the term non-filer:

Definition of a Non-Filer

According to Farlex Financial Dictionary (2009, accessed June 21, 2020),

“A non-filer is a person or corporation who does not file a tax return by the required date. In general, a person who has filed taxes once must continue to do so for the rest of his/her life (or existence, if a corporation).”

Let’s break that down a bit:

You’re a non-filer if you didn’t file in 2018 but did in 2017
You’re still OK if you haven’t filed for 2019; the filing date was moved to July 15 2020 due to coronavirus
You’re a non-filer if you haven’t filed federal taxes in ten years (or 2-9 years for that matter) but did for some prior year(s), as required.
You’re a non-filer if you’ve never ever filed taxes (and were not exempt from filing).

As you might imagine, the longer it’s been, the more complicated it can be to get caught up, and the heavier the potential consequences in terms of interest, fees and penalties (25% of the original amount owed). If you have not filed because you know you’ll have tax debt you can’t pay, avoiding these penalties is your top priority.

I can guess the question many want answered: “What’s my chance of staying a non-filer forever—of flying under the radar ’til the statute of limitations runs out and I’m home free?”

Here’s the reality check, some bad news followed by good news:

The Bad News About Being a Non-Filer

The bad news (it may be news to you) is that if you are owed a refund you must claim it timely (within 3 years) or lose it. Read more about this in my post about the non-filer who believes all is good as the IRS owes him.

The other bad news for non-filers is that data being collected about us in this digital age is being scrutinized by IRS like never before. At one time it was easier to ‘get lost in the crowd’ and not file federal tax returns. But the IRS now has programs to identify and collect from people who are not filing and should be. The IRS is using public and private databases such as driver license records. By cross-referencing databases they can determine who is likely to be earning money that would require them to file.

The Good News for Non-Filers

What many others want to know of course, “Is there a legal way out that won’t bankrupt me or put me in money misery for ever?”

The first piece of good news for non-filers is that regardless of how many years have passed since you filed, to ‘catch up’ you only need to file the last six years. This fact could positively influence your timing. The second piece of good news is that the IRS wants a fresh start with non-filer citizens. It wants to kiss and make up, and get paid something. The steps to get square with the IRS are not complex, but choosing the best option for your financial situation can be. You might also need help devising and carrying out a strategy to pay the least amount. That’s where I come in as your tax advisor and representative. If you’re a non-filer and have decided to explore getting square, I recommend you take me up on a free, confidential phone consult.

I’m CPA Jim Payne, your tax advisor and representative. I look after your interests. I look forward to serving you, saving you money, and releasing you from much of the stress and anxiety of dealing with the IRS or State of Florida tax authorities. Please text or call me at 352-317-5692 or email me for your free phone consult.

“I Avoid IRS Hassles By Not Filing!”

Non-filers — folks who habitually decline to file Federal tax returns— fall into two broad categories:

Those who have significant income withheld by an employer, and figure they don’t have to file because the IRS will probably owe them.
Those that hope to fly under the radar for their entire lives.

The first group is actually kind of common. After all, maybe they will get around to getting caught up next month or next year. No big hurry, the IRS owes them. Right?

Wrong: The IRS seems to ignore them. In actuality, IRS computers have compiled all the W-2s and 1099s and calculated that the government is getting a free loan! But it can get even better for the Government! The statute of limitations will run 3 years after the due date of the return and the taxpayers will no longer be able to claim their refund.

Yea, free money for the government.

What about the second group, those guys that are flying so low that nary a ping hits the IRS monitors? If you live in a lean-to in the wilderness as a hunter-gather all your life, that will work. But for the rest of us, forget it. The IRS is getting better every year at searching through public databases looking for information on people making money and then checking their database of returns filed. It’s just not hard to see this software continuing to improve its ability to crawl through websites and matching information found with returns filed.

Bottom line – Getting by as a non-filer for your entire life is just not likely to work. Filing returns can be stressful for some, but it doesn’t hold a candle to the problems of dealing with IRS Collections people knocking on your door.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

How (Not!) to Make a Gift of your Refund to the IRS

The majority of taxpayers get a refund after filing their 1040. Late filing by these people is not normally a problem since all the penalties are based on the amount of tax due. But, filing too late can be costly.

When you file a 1040 requesting a refund you can think of it as having two different functions.

Function 1 is your report to the IRS to self-assess your total tax liability.
Function 2 is to file an administrative claim for a refund on the overpayment.

If you file your tax return more than 3 years after its original due date, you will lose the right to claim the excess. This is because the claim is only good for tax payments made within the three years prior to the claim itself.

This recently happened to some taxpayers in Wisconsin who filed their 1040 more than three years after the due date and lost their right to claim a $7,000 plus refund. The Golden Rule here is “FILE THE BLOODY RETURN WHEN IT’S DUE”. These things simply do not age well.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.