If you fail to file your tax returns on time you could be charged with a crime. The IRS recognizes several crimes related to evading the assessment and payment of taxes. Penalties can be as high as five years in prison and $250,000 in fines. However, the government has a time limit to file criminal charges against you. If the IRS wants to pursue tax evasion or related charges, it must do this within six years from the date the unfiled return was due. Non-filers who voluntarily file their missing returns are rarely charged.
People may get behind on their taxes unintentionally. Perhaps there was a death in the family, or you suffered a serious illness. Whatever the reason, once you haven’t filed for several years, it can be tempting to continue letting it go. However, not filing taxes for 10 years or more exposes you to steep penalties and a potential prison term.
If you have old, unfiled tax returns, it may be tempting to believe that the IRS or state tax agency has forgotten about you. However, you may still be on the hook 10 or 20 years later. If you don't file and pay taxes, the IRS has no time limit on collecting taxes, penalties, and interest for each year you did not file.
It’s only after you file your taxes that the IRS has a 10-year time limit to collect monies owed. State tax agencies have their own rule and many have more time to collect. For example, California has up to 20 years after you file to collect.
Just because you didn’t file your return doesn’t mean the IRS won’t file one for you. The IRS may file a Substitution for Return or SFR on your behalf. Don’t think of this as a complementary tax filing service. The IRS won’t give you any of the exemptions or deductions that rightfully belong to you.
Once an SFR is filed, you will be sent a notice to accept the tax liability as filed in this alternate return. If you don’t respond, the IRS will issue a notice of deficiency. At this point, the tax is considered owed by you and the IRS can begin the collection process. To encourage payment, a levy can be placed on your wages or bank accounts. A federal tax lien may also be placed against your real property.
If an SFR was filed, you don’t have to accept the outcome. You can go back and refile those years and include any available deductions. Chances are you can decrease the tax owed, as well as the interest and penalties.
You may want to file your old returns before a demand is made. There’s no time limit for submitting a previously unfiled return. However, if you’d like to claim your refund, you have up to three years from the due date of the return. It may be a good idea to speak with an experienced tax attorney or CPA before filing old returns. But, here are some benefits of getting missing tax returns filed:
If your tax assessment is too high, you may be able to negotiate a better deal. Penalties may represent 15 to 20% of what you owe to the IRS. Getting these removed can make a real difference. File Form 843 to request an abatement of taxes, interest, penalties, fees, and additions to tax.
If your debt is more than $10,000, you might consider a Partial Payment Installment Agreement (PPIC) where the IRS agrees to accept less than the total you owe. The IRS will only agree to a PPIC if it’s clear that the monthly payments you can make will not cover your total taxes due for many years.
An offer in compromise (OIC) is an agreement between a taxpayer and the IRS that settles a taxpayer's tax liabilities for less than the full amount owed. If you can fully pay your liability through an installment agreement or other means, you won't generally qualify for an OIC.
The interest and penalties on back taxes can be substantial. If it’s likely that you owe money, it’s a good idea to talk with an experienced tax attorney before filing your past due returns. An attorney can negotiate with the IRS or state tax agency and set up a payment schedule you can reasonably meet. It may also be possible to reduce the fines and fees assessed against you.