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IRS actions on back tax returns

Jim Buttonow, CPA, CITP

SVP Post-Filing Tax Services

Published on: June 06, 2023

When taxpayers don’t file required tax returns, the IRS can pursue those returns (called enforcement) through its IRS Collection and Examination (audit) functions. The IRS Collection function pursues most unfiled returns, starting by identifying non-filers using third-party information returns (such as Forms W-2, 1099, etc.). Most of the time, taxpayers will receive several notices asking them to voluntarily file their back tax returns.

Possible IRS actions to expect if you have back tax returns

If you haven’t filed required tax returns, you may face any of the below IRS enforcement activity, depending on your situation.

Notices asking you to file or explain why you haven’t filed

If you don’t file, the IRS can send a request to file (usually IRS notice CP59) in November or the following February. The CP59 inquiry is the most common IRS non-filer notice. If you don’t file or explain why you don't need to file (using IRS Form 15103, Form 1040 Return Delinquency), the IRS can send more reminder notices (usually IRS notice CP516) to ask you to file. If you still don’t file, the IRS can step up its enforcement activity.

Taxpayer delinquency investigation (TDI)

If you haven’t filed a required return, the IRS can send your case to the IRS Automated Collection function and the Collection Field function for enforcement. Here, the IRS can charge, or assess, the taxes it thinks you owe through a substitute for return (SFR).

Substitute for return filing (SFR)

An SFR is a return the IRS prepares and files for you. The IRS makes a tax assessment based on your available income information (including Forms W-2s, 1099, and other information gathered). But the IRS prepares the return with the highest tax rates and without the benefit of any credits or deductions (including favorable filing status elections and deductions for dependents).

The IRS follows the same procedures that it uses in an audit (called deficiency procedures) to propose and assess additional tax, penalties, and interest. Before the IRS files an SFR, the IRS will give you a final opportunity to file a return, agree to the proposed tax or file a petition with the Tax Court to challenge the proposed tax.

Civil and criminal investigation

Taxpayers with many back tax returns and large tax bills can face local IRS investigations by IRS Examination and Collection personnel, as well as IRS Criminal Investigation special agents. Taxpayers in this situation can incur significant civil and criminal fraud penalties for non-filing.

Refund holds

In some cases, the IRS can freeze your refund if you have back tax returns and may owe taxes on them. Refund holds can look back up to five prior years where the IRS has identified a potential liability and put a refund freeze indicator on your account. The IRS usually holds the refund for six months to allow you to explain or file your return. After the six-month hold, if the IRS doesn’t receive a return, the IRS may make an assessment through the Automated Substitute for Return program. The IRS would release your refund after applying it to any balance you owed on the delinquent return.

IRS Collection and its Return Delinquency program start most refund freezes. However, if you're undergoing an audit or underreporter inquiry, and the IRS auditor thinks you will owe taxes as a result of the audit or an unfiled return that was identified during the audit, the auditor may hold your refund.

Tip: If you have a refund freeze, you’ll get IRS notice CP63. You should immediately contact the IRS to understand what years you need to file to release the refund.

We're here for you

Have back tax returns? Contact a Jackson Hewitt Tax Pro today to get help uncovering which years you need to file and what other immediate actions you need to take to limit the damage and get back in good standing with the IRS. 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.

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