Riches in Your Unfiled Tax Returns

Stay out of federal prison and discover the potential riches in your unfiled tax returns. Here is another installment in my new book. This could be extremely valuable to you. Enjoy!

Chapter 12

What if You Haven’t Filed Your Tax Returns for Years?

Many clients contact me that have not filed their tax returns in years. Sometimes decades. You are not alone! There is always hope no matter how ugly you think your tax situation is.

There are 2 important things you need to know about unfiled tax returns. First, it is a crime not to file when required. Will you go to jail? It depends. Not filing is a crime. Not paying is not a crime (but tax evasion is a crime).

Second, the IRS will not speak to you (or your tax resolution representative) about any relief options to settle your tax debt if you are not “compliant” with your filings. To be compliant, among other things, you will be required to file your last 6 years of returns, at a minimum. 

Criminal Charges for not Filing Your Tax Returns

Yes, it is a federal crime not to file your tax returns. It is punishable by up to one year in jail and a fine of up to $25,000 for each unfiled tax year.

Many clients don’t file because they owe and can’t pay. Not filing is a crime. Owing money to the IRS is not a crime. So, file even if you can’t pay.

Will you really go to jail? It depends. The IRS will bend over backwards and send you a ton of notices to get you to resolve your tax debt before filing criminal charges against you. Don’t push it though. 

Some horror stories for you to see for yourself https://www.justice.gov/tax/united-states-attorneys-tax-related-press-releases-2016

If you are an attorney and the IRS files criminal charges against you, you can lose your license to practice law—even if you manage to escape jail time. Don’t risk it. Get cleaned up sooner than later.

What if I Don’t Have My Past Tax Records?

If you don’t have all of your tax data, we can rebuild your tax data using several methods. Among these methods are obtaining your IRS Transcripts, sometimes a Freedom of Information Act Request (FOIA), requesting income information from Social Security, bank records, and other proprietary methods. So, no excuses.

Prepare Your Past Due Returns with the Utmost Caution

If you have not filed in years, the returns that need to be filed also need to be prepared with extra caution to avoid an AUDIT. You can do it yourself but…. I recommend that as much as I recommend you doing your own brain surgery. The amount you pay to have these types of returns prepared by a professional that understands IRS tax resolution will likely save you large amounts of money and is always your best bet. Just any old tax preparer will not do in this situation. There are special strategies that need to be employed in these cases.

In some cases, I have advised my clients not to claim any expenses or deductions when filing several years of unfiled tax returns. This makes the tax bill bigger but avoids an Audit. This usually applies to clients that cannot pay and will highly likely be successful with an OIC. Like I always say—if you can’t pay, you can’t pay—it doesn’t matter how many zeros are added to your tax bill.

Once you are ready to file your returns, you should e-file as many as possible, which is usually the 3 most current years. The others will have to be paper filed. It is of utmost importance that the returns be mailed in separately and via certified receipt return receipt requested. Do not lump them altogether in the same mail package. Once all the required returns are filed, then sit back and wait for them to be “assessed.” 

Refunds—you will lose your IRS refund if you wait too long to file

Many clients wait too long to file to get their refund. Here is a true story about one of my clients who waited a long time to file. He was due a refund over $60,000. Guess what? He did not get his refund because he waited too long to file. You have to request a refund within 3 years of the due date of the IRS return, otherwise you lose your right to the refund. What a waste!!!

States have refund statutes of limitations too. See your jurisdiction for details.

The IRS will file your return for you without asking you—Substitute for Return (SFR)

What actually happens is that the IRS adds up all your income that was reported to them on W-2s and 1099s etc. Then, they calculate tax on your income and send you the bill. They do not include or give you the benefit of any deductions, credits, or other tax benefits in the calculation—the SFR is limited strictly to income (with one exemption). In most cases, the tax allegedly owed is substantially OVERSTATED. It pays to get it together and have your returns prepared and filed for you by a competent tax resolution specialist.

If you don’t pay timely, the IRS will start enforced collection by liens, bank levies, property seizures and so on. To stop an active bank levy, your returns have to be filed. This can cause a fire drill to get your returns filed in time to stop the levy.

So, it’s up to you to file your original tax return or an amended return for the years the IRS assessed you under the SFR. You could even be entitled to a refund for that year (if you don’t wait too long) but the IRS doesn’t know you are entitled to a refund until you file your own return.

Unfiled Returns and Bankruptcy

Many, but not all, tax debts are dischargeable in bankruptcy. But not for years that you have unfiled returns, even if the IRS filed an SFR for that year. Also, if you file returns too near in time before filing bankruptcy (or after bankruptcy has been filed), these may not be dischargeable either (there are several filing time line rules that need to be satisfied to qualify for your tax debt to be dischargeable in bankruptcy—more on that later).

Final Thoughts

Once your returns are both filed and assessed (and not before), then the IRS will negotiate a relief option with you or your tax resolution representative. Frankly, you should never speak to the IRS without representation. If you do, you will most likely leave thousands, tens of thousands, or hundreds of thousands of dollars on the table. It happens all the time. Just sayin!!

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