Falling behind on filing your tax returns can be scary, filled with questions and doubt about how to make it right with the IRS. Fortunately, there are steps that can be taken to satisfy the IRS and handle unfiled tax returns issues to get you back into the system.
Here are 10 things you should know about getting current with your unfiled tax returns:
- In most unfiled tax returns, the IRS requires the last six years’ tax returns to be filed as an indicator of being current and compliant. The reference is IRS Policy Statement 5-133 and Internal Revenue Manual 126.96.36.199. This is the starting point – preparing the last six years’ tax returns for filing.
- Organize your records. It is important to do your best to gather your records for the years where you did not file. This can include 1099s or W2’s you received for work your completed, mortgage interest you paid, or interest, dividends and stock sales. Do not worry if you are missing some records.
- Your records are supplemented by securing internal IRS transcripts that will show what has been reported to the IRS – this will be a comprehensive listing of the 1099s and W2s that were sent to you. This cross-checks against your own records, filling in for anything that is amiss.
- The IRS transcripts are a checking point – if there is income you earned that is not on the transcripts, make efforts to determine that income and include it on your tax return.
- If you are self-employed, business income and expenses need to be determined. Income can be pieced together by several methods, including 1099 reporting to the IRS (supplemented by any income not reported), or your total bank deposits. Working backward, determining what you spent to live (food, housing, utilities, auto expense) can cross-check your income on the presumption that you at least earned what you spent and saved.
- Before preparing the tax returns, a financial review should be completed to determine how any taxes can (or cannot) be repaid to the IRS. Unfiled returns are really a two-step process, consisting of (1) getting the returns prepared and filed and (2) negotiating solutions to balances due with IRS collections. This involves a review of your current income, living expenses, property, and debts.
- If you are married but only one spouse earned income, strong consideration should be given to filing a separate return for the spouse that caused the liability. Filing separately can limit who the IRS can collect from – protecting your innocent spouse.
- If you were employed with wages and had taxes withheld from your paycheck, it is possible that you may not owe the IRS at all. This will depend on the amount withheld from your wages and any other deductions you may have (mortgage interest, etc.).
- Most times, when you have a unfiled tax return, the IRS files one for you. In IRS-speak, this is called a Substitute for Return (sometimes known as an SFR). Most times, an IRS substitute for return gets it wrong, charging you for income that was reported on W2s and 1099s but not giving you any deductions or exemptions. You may already have a bill from the IRS from a Substitute for Return. These estimated returns can be corrected – and the tax lowered – by filing an original return.
- If possible, the unfiled returns should be hand-filed at an IRS walk-in center – bring an extra copy to get it stamped by the IRS as proof of filing. If you are working with an IRS Revenue Officer, the returns should be filed directly with that person. It can take the IRS several months to process the returns – watch for billing notices in the mail that will indicate the IRS processed the returns and you are back in the system. If you owe money, the next step is solutions to the balances due -usually consisting of compromise, installment agreement, uncollectible and bankruptcy.