Unfiled Tax Returns

If you have not filed a tax return in a while, you may be wondering what options you have. It is generally in your best interest to file those back tax returns as soon as possible. If you need to file a prior tax year or even multiple years of tax returns, you want to ensure that the return is as accurate as possible. There are many reasons accuracy is important. Penalties and interest accrue from the base tax owed is one such reason. Another reason would be the possible implications from a state agency. The IRS and most states exchange information. Also most states income taxes are based off of some deviation of your adjusted gross income from you federal income tax return. If your federal AGI is artificially high due to not taking all allowable deductions it will result not only in a higher federal income tax liability but also a higher state income tax liability.

When you fail to act before the IRS does, they will file a substitute for return (SFR ) for you. When the IRS files an SFR for you it is there best guess. The service will typically file the return in the best interest of the United States government. This means they will file it as you were single or married filing separately with no deductions, credits, or expenses. The service will then tack on a variety of penalties and then assess interest. This whole process is done to have the tax assessed. Once the tax is assessed the IRS can then use their steam roller of a system to collect.

Filing an unfiled tax return or even multiple years is not as big of a deal as you may believe. Even if you cannot pay the taxes that are owed with the return it isn’t that big of a deal. It is a big deal if you keep waiting longer and longer to file your back return(s) because the consequences may get worse. One thing you need to know is the sooner you file your taxes the better off things are going to be. No matter how you look at it the longer you wait the harsher the consequences may end up. You might be surprised to learn that filing back taxes may be the simplest way to get out of your tax problems. You do however need to protect yourself and have a plan. I would recommend the following 5 steps:

The first step is to gather all of your information for each year you failed to file a tax return. Research thoroughly any missing information to be sure the return you file is correct. Do you have your W-2’s, 1099’s and mortgage interest statements. Many taxpayers with unfiled back tax returns have lost their tax records. You may contact the IRS to request a wage and income transcript. This transcript will give you the wage and income information you’re missing. If you were self employed you may need to work with an accountant to help recreate an accounting or determine estimates for you.
The second step is filing your past due IRS returns. The question needs to be asked whether to file your tax returns yourself or hire a professional. If you decide to do it yourself be sure to use a reliable tax software. You should also plan on spending two to three hours on each year.
Protect your refunds. You need to know there are strict time limits for statute of refunds, audits and collections. You should also know that if you owe taxes for other years, the refunds may be taken to offset those other debts.
Deal with the tax debt that is owed. You should have a plan for how you will pay off your tax debts. You will need a plan to protect yourself from IRS assessments, levys, liens and seizures. Your plan could be as simple as setting up a payment plan or writing a check for the full amount. Regardless of your situation you need a plan because ignoring the IRS can get you in trouble fast.

Plan ahead. If you found yourself owing in past years, you should do some tax planning for the current year. You should adjust the withholding in your paycheck by completing a new W-4 for your company’s payroll department. If you make estimated tax payments they should be adjusted to fulfill your tax liability.