Unfiled Tax Returns

Consequences of Unfiled Tax Returns

The IRS can assess a failure-to-file penalty of 5% of unpaid tax per month, up to a maximum of 25%. This is in addition to the failure-to-pay penalty and interest. For returns more than 60 days late, the minimum penalty is the lesser of $485 or 100% of the unpaid tax. The IRS may also file a Substitute for Return (SFR) on your behalf using information from W-2s and 1099s — these substitute returns do not include deductions, credits, or exemptions you may be entitled to, often resulting in a significantly inflated tax bill. In extreme cases, willful failure to file can result in criminal prosecution with penalties of up to one year in prison per unfiled year.

IRS Substitute for Return (SFR) Program

When you do not file, the IRS may eventually prepare a substitute return using income information reported by your employers and financial institutions. SFRs are filed using the least favorable filing status (typically single or married filing separately with zero exemptions) and include no itemized deductions, business expenses, or credits. This almost always results in a higher tax liability than what you would actually owe. Once an SFR is assessed, the IRS begins collection on that amount. You have the right to replace an SFR by filing your own return claiming all eligible deductions and credits.

How Far Back Do You Need to File?

While the IRS can technically require returns for all unfiled years, its general policy (outlined in IRS Policy Statement 5-133) requires that you file the last six years of returns to be considered compliant. In many cases, especially when working toward a resolution, the IRS may only require the most recent three to six years. Your tax professional can negotiate with the IRS to determine which years must be filed. If you are owed refunds for older years, note that you can only claim a refund within three years of the original due date — after that, the refund is lost.

Getting Back on Track

A tax professional can help reconstruct your income records using IRS transcripts (Form 4506-T to request wage and income transcripts), gather deductions and credits you are entitled to, and file accurate returns that often result in significantly lower liability than IRS substitute returns. Once all returns are filed, you can move forward with resolution options such as installment agreements, Offers in Compromise, or Currently Not Collectible status. Filing promptly can also stop additional penalties from accruing and may allow you to claim refunds that would otherwise be lost.

Who Qualifies?

• You have one or more years of unfiled federal tax returns
• You need to come into compliance as a prerequisite for an IRS resolution program
• The IRS has filed a Substitute for Return (SFR) that overstates your actual liability
• You want to claim refunds before the three-year deadline expires