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Per IRS estimates for 2022, almost 12 million taxpayers did not file a required return. Add to that the growing number of taxpayers who still must file returns to continue receiving advance payments of the premium tax credit to pay for their health insurance. In all, there are likely more than 15-18 million people who must file back tax returns each year.
If you have unfiled returns, what does it take to get back in good standing with the IRS?
There are four steps you should take to get back into U.S. tax compliance and limit the damage due to the unfiled returns:
- Contact the IRS to figure out the IRS’ enforcement impact. Look into whether the IRS has started or completed a delinquent return investigation. If so, you will likely need to request time to file or take action to reverse prior IRS actions.
- Determine which years you need to file. It may be fewer than you think.
- File accurate returns at the right place at the IRS. Hint: The IRS can help you here.
- Limit the damage by addressing penalties and tax bills. Try to lower penalties and get into a collection alternative if you owe, but can’t pay the full amount right away.
The first step: Contact the IRS
You’re committed to getting back on track with all your tax filings. Your first step is contacting the IRS to see what the IRS is doing on your account.
- Has it started a delinquent return investigation?
- Who is your case assigned to? For example, is it an IRS service center that will send notices, or a local revenue officer who will visit you and ask why you haven’t filed?
- Has the IRS already filed a return for you (called a substitute for return, or SFR)?
These questions will need answers. When you contact the IRS, you should also order your Wage and Income Transcripts for the years you need to file. The IRS will send you transcripts with information from third-party information forms, including Forms W-2 and 1099, under your Social Security number for each year. Remember to order your spouse’s records, too, if you are filing married filing jointly.
Wage and Income Transcripts are generally delivered to the taxpayer without employer or payor information (the IRS “masks” the identifiable information). The IRS will provide unmasked Wage and Income Transcripts when needed for preparing and filing tax returns.
If the IRS has already charged, or assessed the tax, ask for more time to file the returns. The IRS will usually grant you a “stay” of up to a month to file the returns.
Next: Determine which years you need to file
For people who haven’t filed in a long time, the most common mistake is to file too far back. How many years back are you required to file to be good standing?
The answer lies in a little-known IRS rule.
IRS Policy Statement 5-133, Delinquent Returns – Enforcement of Filing Requirements, provides a general rule that taxpayers must file six years of back tax returns to be in good standing with the IRS. The policy also states that IRS management would have to approve any deviation from that rule.
Sometimes, IRS managers will require tax returns from even further back than six years, depending on:
- The degree of flagrancy
- A history of noncompliance
- The impact on future voluntary compliance
- The existence of income from illegal sources
- Whether there is minimal or no tax due
- IRS costs to secure the return, versus anticipated tax revenue
When you contact the IRS, you can ask how many returns you need to file. If the IRS tells you it’s more than six years, ask why, and remind them of Policy Statement 5-133.
The IRS is most likely to divert from the Policy Statement if:
- The IRS has assigned a local revenue officer to enforce the filing of the back returns.
- There is a large potential tax bill (common situations are asset sales, income without withholding, no estimated tax payments).
- If there is a business involved.
Next: File accurate returns to the right place at the IRS
One important note: The IRS doesn’t pay old refunds. You can recoup refunds only for returns filed within three years of the due date of the return. Refunds for prior years are lost and can’t offset any balances due.
It’s essential to prepare an accurate return that matches IRS records. With back tax returns, you should trace your income history. Without this match, the IRS can question the accuracy of your return. Also, if you made estimated tax payments that can be credited to any balances you owe, get your account transcripts to verify the amounts you paid.
You will also need to file the return with the proper IRS unit.
- Returns without any enforcement activity go to the regular filing location.
- If you have received a notice, you should file the return with the location indicated on the notice.
Sending to the wrong unit can delay processing for several months.
Last step: Limit the damage by addressing penalties and tax bills
There can be substantial penalties on balance-due returns:
- Failure to file penalty (5%, max of 25%).
- Failure to pay penalty (0.5% per month, max of 25%); combined with failure to file penalty, together they can reach a maximum of 47.5%.
- Fraudulent failure to file penalties triples the normal failure to file penalty – increasing the maximum penalty to 75% from 25%.
You should request penalty abatement if you qualify. With most late-filed tax returns, you can ask the IRS not to assert applicable failure to file or pay penalties on balance-due returns. There are two main reasons taxpayers use when asking the IRS not to assert or to abate these penalties:
- First-time penalty abatement for the first year if you have a clean compliance history in the prior three years
- Reasonable-cause arguments for late filing and payment
Remember, if you can’t pay the tax bill, there are several types of payment agreements available to you, depending on your circumstances. If you don’t pay the tax or set up a qualifying agreement with the IRS to pay the balance, the IRS will start enforcing collection on the unpaid taxes you owe.
We're here for you
If you need to file back tax returns, learn how Jackson Hewitt can help. At Jackson Hewitt, we have over 40 years of expertise to help you manage your tax issues. Whether simple or complex, our team of licensed professionals are trained to work directly with the IRS, while keeping you updated every step of the way. Start for free today and learn about how we can help resolve your tax issues.
About the Author
Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.