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If you don’t file a required tax return by the deadline, it’s called a back tax return, an unfiled return, or past-due return. You can face consequences with the IRS if you have back tax returns.
The IRS may contact you to ask you to file, or may take more serious actions, such as filing a return for you or opening a criminal investigation. Taxpayers can face substantial penalties for late filing, including a 5% per month late-filing penalty (up to 25%) of the unpaid taxes. To get back into filing compliance, you should follow IRS procedures and use several best practices to resolve your late-filing issue.
What you need to know about back tax returns
A few important items about unfiled and past-due tax returns:
- Taxpayers with a filing requirement need to file an accurate annual tax return by the filing deadline. Not filing can cause serious IRS enforcement actions, including civil and criminal investigations.
- The penalties for late filing can be substantial, but can be forgiven, or abated, under first-time penalty abatement or for reasonable cause.
- For individual returns, failure to file penalties apply only if your return shows that you owe taxes. However, the penalties can be significant: 5% of the tax you owe, per month, up to 25%. The civil fraudulent failure to file penalty is 15% per month, up to 75% of the tax you owe.
- You can request relief from late-filing penalties for one year if you have a clean compliance history for the past three years, using the IRS first-time penalty abatement waiver. If you don’t qualify for first-time abatement, you can request relief if you can show that you had unforeseen circumstances outside of your control that caused the late filing (reasonable cause argument).
- Taxpayers with a late-filed return may also be subject to a failure-to-pay penalty (.05% of the tax owed per month, up to 25%). When combined with the failure to file penalty, the two penalties can reach a maximum of 47.5% of the taxes you owed.
- For individuals, the IRS usually requires only that you file returns for the past six tax years to be in compliance. IRS Policy Statement 5-133 explains that the IRS enforcement period is generally six years.
- The IRS can deviate from the six-year policy if it believes you will owe significant amounts in years prior to the past six tax years, if you are filing a business return, or if you have a history of not following tax rules. Normally, the IRS deviates from the policy when taxpayers are assigned to IRS field collection (i.e., a revenue officer is assigned to their case) or if you are a business.
- IRS transcripts can help you file an accurate past-due return. The IRS can provide your wage and income transcripts by year, as well as account transcripts to show any payments or credits.
- If you don't file a return, the IRS can file one for you – and you will owe taxes, penalties, and interest. This return is called a substitute for return (SFR). The IRS will prepare and process a return that includes only your income and withholdings – no deductions, preferred filing status, or credits. You can use special procedures to file an original return to replace the SFR return.
- The IRS can freeze future refunds. If you don't file a required return, you can face IRS refund freezes on returns you file in future years.
- If you file late, you may have to use special IRS procedures to file your return. Special procedures can include matching your return to IRS income records or filing your return directly with an IRS enforcement function (Collection, Audit, etc).
- Late filing is enforced by IRS Collection employees. These investigations are called taxpayer delinquency investigations or return delinquency investigations. IRS Collection employees (revenue officers and Automated Collection staff) are responsible for pursuing non-filers. However, all IRS enforcement personnel (Audit, Collection, etc.) can pursue enforcement against a non-filer.
Background on back tax returns
How often do people not file?
Each year, about 12 million taxpayers don’t file a required tax return. The IRS conducts millions of delinquent return investigations each year. Some taxpayers just receive delinquent return notices (such as IRS notice CP59). For non-filers who fail to respond to IRS notices, the IRS may prepare and file a return on their behalf and/or pursue other enforcement actions. At the end of 2022, the IRS had 2.3 million open taxpayer delinquency investigations.
How long does it take to resolve once the back tax return is filed with the IRS?
One day for e-filed returns, or three to 15 months for paper filed returns, depending on the level of IRS enforcement involved. Normally, if you are filing the past two years, a tax pro can e-file the return if the IRS does not have an active delinquent return investigation. However, returns that are more than two years delinquent require you to paper file the return--and this takes longer. If you file an older return and there is no IRS delinquent return investigation, it normally takes the IRS about three to six months to accept the paper filed return. If the IRS started a formal taxpayer delinquency investigation and/or files a substitute for return, it can take up to a year or more depending on IRS operations for the IRS to accept the filed return to replace the SFR.
Most likely solutions for resolving unfiled past-due returns
- Use late-filing procedures to file a late return. File an accurate, late return with the IRS that complies with IRS delinquent return filing instructions. This solution is usually precipitated by an IRS delinquent return investigation.
- File over a substitute for return (SFR reconsideration). Once the IRS begins or completes filing an SFR, using information in its records (such as Forms W-2, 1099, and other third-party information), you will need to file an original return to replace the SFR. This solution requires you to work directly with IRS Collection and/or the Automated Substitute for Return function to have the return accepted. In cases where the SFR was done by an IRS auditor, the taxpayer will need to work directly with the auditor on SFR reconsideration.
Other potential solutions for resolving unfiled past-due returns
- Respond that you don’t have a filing requirement. If you receive a delinquent return notice from the IRS (usually IRS notice CP59), you will need to determine whether you have a filing requirement or have filed the return. Contact the IRS directly to research your IRS account and get your IRS wage and income transcripts. If you have filed or don’t have a filing requirement, you should complete Form 15103, Form 1040 Return Delinquency, and explain your circumstances to the IRS. If you have already filed a return, attach a copy of the return with your response.
- Request removal of the IRS filing requirement. You can also use Form 15103 to request that the IRS delete your filing requirement. Some delinquent return inquiries are based on prior-year filing requirements. You may need to explain to the IRS that you don’t have a filing requirement for the year in question.
- Employment-related tax identity theft. Employment-related tax identity theft occurs when a thief steals your Social Security number (SSN), and income is erroneously reported under your SSN. Taxpayers who have wages or other income reported under their SSN need to resolve the identity theft issue with the IRS and also work with the IRS to remove their filing requirement. This often happens to elderly taxpayers who don’t meet income filing requirement thresholds.
Steps to resolve an unfiled past-due return(s)
Here are the steps to resolve a past-due tax return:
- Make sure you haven’t filed a required return. Review your tax documents to determine whether you were required to file and/or have already filed an accurate return under your SSN. If you didn’t have a filing requirement or already filed the return, you will need to use IRS Form 15103 to respond to the IRS and ask the IRS to delete the filing requirement/delinquency inquiry. Business taxpayers will need to contact the IRS directly to remove the filing requirement. In most cases, IRS delinquent return inquiries start because there is no record of the taxpayer filing and there is income reported under the taxpayer’s SSN that indicates there is a filing requirement.
- Contact the IRS. You will need three items from the IRS: transcripts to file an accurate return, an extension of time to file to avoid enforcement action, and any special filing instructions. Start by ordering an IRS account transcript and an IRS wage and income transcript (shows all Forms W-2, 1099, etc.) for the year(s) in question. Look over the transcripts, any payments you made to the IRS, and the income reported to the IRS. In some cases, you will find mistakes on Form W-2 or 1099 that need to be corrected to resolve the delinquent return inquiry. You may also find employment-related tax identity theft if someone is fraudulently using your SSN. You can also ask the IRS for more time to resolve the late return to avoid further enforcement letters and the filing of a premature substitute for return. You should also ask about specific filing instructions to resolve the matter.
- Gather your tax documents to file. If you need to file a late return, you will need to gather your tax information for the year(s) in question.
- Complete your return(s). You will want to make sure that your return includes all the income on your Forms W-2, 1099, etc., found on your IRS wage and income transcript for the year. You can compare IRS records with your return to identify any discrepancies that you need to address to file a correct return. If the return doesn’t include or explain the omitted income items, the IRS can question the return through an audit or notice.
- Prepare a penalty non-assertion letter for penalty relief, if applicable. You can protest any late-filing penalties by explaining to the IRS the unforeseen circumstances outside of your control that caused you to file late. Attach a request that the IRS not assert the late-filing penalty with your filed return (if you’re filing by paper). If the IRS ignores the penalty relief request, you will get an opportunity to request penalty abatement after you receive the first IRS assessment letter (usually IRS notice CP14). Serious illness/incapacitation, lack of information returns needed to file, and ignorance of the tax law are common arguments against the late-filing penalty. Financial hardship and reliance on a tax professional are not good arguments for late filing.
- If you owe taxes and can’t pay, determine your collection alternatives. If you can't pay, you will need to determine your best collection option (extension to pay, IRS payment plan, currently not collectible status for hardship situations, or an offer in compromise). If you need a payment plan, attach Form 9465 to your return to request an installment agreement. If you don’t pay the penalties and interest with your late return, the IRS will send a notice outlining any additional interest and penalties after processing the return.
- File the return to the proper IRS location. If you file before the deadline on the notice, you can file at the location listed on the notice. If you miss the notice deadline, you should contact the IRS for any special filing instructions. This will speed up the IRS review and acceptance.
- Monitor the processing and acceptance of the return. IRS operations sometimes have issues with processing late returns. Taxpayers should monitor their notices and IRS account transcripts, and periodically contact the IRS to make sure that the IRS received and is processing the return. The IRS may have questions related to the late return. (The IRS scrutinizes late returns, especially those filed on paper.) If the IRS has already charged, or assessed, the taxes and has started collection activity, you should periodically request a collection hold on the account until the IRS processes and accepts the late return.
- If applicable, set up a collection alternative and follow up on any collection alternatives. If you need collection alternatives, such as a payment plan, an extension to pay, or other hardship solutions, you will need to act quickly after the IRS assesses the tax to avoid IRS collection enforcement.
You can appeal a disagreement with the IRS over an unfiled past-due return
SFRs, like audits, follow deficiency procedures, which allow you to appeal any proposed tax bills before the IRS charges, or assesses, the taxes and you have to pay them.
Generally, if the IRS selects a delinquent return for Automated Substitute for Return processing, the IRS will calculate an estimated tax liability for you based on your available income information and notify you of the proposed assessment through a “30-day letter.”
You can respond to the 30-day letter by filing a tax return, agreeing to the proposed assessment, or disagreeing with the proposed assessment. If you fail to respond to the 30-day letter or fail to resolve the disagreement with the IRS, the IRS will send a “90-day letter” (Statutory Notice of Deficiency). The Statutory Notice of Deficiency will provide you with the opportunity to challenge the proposed assessment by filing a petition with the Tax Court within 90 days of the date of the notice (150 days if the notice is addressed to a person who is outside the U.S.).
If you fail to file a petition with the Tax Court within the allowed time period or fail to otherwise resolve the return delinquency with the IRS, the Automated Substitute for Return program will prepare an SFR and assess the proposed tax.
If the IRS files a return for you (called a substitute for return, or SFR), you can appeal any tax bills that result from the SFR. The IRS accepts most original returns that taxpayers file to replace SFRs if their returns include all items reported to the IRS and there are no large, unusual, or questionable items on the returns.
Best practices for filing back returns
Use these best practices to resolve a late filed return:
- Use IRS wage and income transcripts to file an accurate return. IRS tax examiners will closely screen late-filed returns before accepting them to make sure that you reported all income items that were also reported to the IRS (Forms W-2 and 1099). You can pre-screen your return for accuracy by requesting your IRS wage and income transcripts directly from the IRS and confirming that these items are reported accurately on your return. This will speed up IRS acceptance of the return and reduce the chances of an audit or discrepancy notice.
- Monitor processing and acceptance. The IRS can take four to six months to accept a return as filed – especially if the return is filed on paper or if you have current or prior SFR enforcement activity. You should contact the IRS every month to check on the status of your filed return.
- Request a collection hold if you’re filing a return to replace an SFR. If the IRS filed an SFR for you, you will owe taxes to the IRS. When you file a return to replace the SFR, you should also request a collection hold to avoid collection enforcement activity while the IRS is reviewing your late return.
- You may only need to file the current and past 6 years of tax returns to be in filing compliance. But if any other past years have an SFR, you should file returns for those years, too. You can usually reduce the taxes you owe from an SFR by filing an original return that claims additional deductions and credits not allowed in an SFR. To find out how many years the IRS requires you to file, ask the IRS. If the IRS requests more than the past six years, you should confirm that the IRS deviated from its normal six-year policy, which requires IRS manager approval.
Avoiding past-due tax returns
Take a few precautions to avoid back tax returns in the future:
- Make sure you’re aware of filing requirements and deadlines.
- Timely request filing extensions, as needed.
- Coordinate with your tax preparer to ensure completion of mandatory returns by the due date.
- Monitor and confirm acceptance of filed returns.
Beware of scams
Keep an eye out for scams and fake emails claiming to be from the IRS. The IRS usually doesn’t contact taxpayers through email. However, fake notices are being mailed to taxpayers. Don’t use the address or call the phone number on a notice if you suspect it is fake. Instead, call the IRS at (800) 829-1040 to verify the authenticity of an IRS notice or letter before sending personal information or mailing a check.
How a Tax Pro can help
A Tax Pro can coordinate with the IRS to ensure proper processing and acceptance of tax returns that are filed late. A tax professional may also help prevent IRS enforcement actions and work to limit excessive tax liabilities that might be generated by the IRS. Unfiled return representation services include:
- Filing a power-of-attorney with the IRS
- Obtaining and analyzing IRS records and delinquent return enforcement actions
- Determining which years are required to file and proper procedures for filing each year to get IRS acceptance
- Working with the IRS on questions related to acceptance of the return
- Requesting substitute for return reconsideration, if needed, and working with the IRS SFR Unit for acceptance
- Requesting IRS enforcement extensions while the returns are being processed and reviewed for acceptance
- Confirming acceptance of the late returns
When faced with a delinquent return investigation by the IRS, an experienced tax pro can provide critical guidance and assistance to resolve complicated tax matters.
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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.