Filing Back Taxes: What You Need to Know
Perhaps there was a reason why you got behind on your taxes, maybe it was the death of a relative or a serious illness.
When you receive a notice from the IRS, it can be tempting to ignore it and to continue neglecting filing back taxes. However, you become more exposed to steep penalties, interests and a possible prison term. If you voluntarily file the missing returns, it is likely you’ll not be charged.
Filing back taxes is a smart move even if you can’t afford to pay off the tax debt in full. You may negotiate an IRS payment plan, or you can receive a reduction of the tax debt you owe.
Back Tax Returns at a Glance
The IRS has laws related to evading the assessment and payment of taxes. It’s worth noting, the IRS can attempt to collect your back taxes for up to 10 years from the day they were accessed (the ten-year Statute of Limitations on IRS collections).
Besides getting a notice from the IRS, there are stiff consequences and complications of not filing back taxes:
- Deal with the IRS: If you have been a non-taxpayer (you owe taxes and don’t file taxes), the government has the right to pursue your unpaid taxes for more than 10 years (although there are certain exceptions or appeals).
In this case, the IRS has no time limit to collect your taxes. The 10-year Statute of Limitations only applies after filing your back taxes.
- Penalties and interests: Fines can be as high as $250, 000 and penalties can be 5 years in prison.
- Hold your tax refund: Even if you’ve been late on filing back taxes, you’re still entitled to refunds.
However, there is a strict time limit before your refund ‘expires.’ In most cases, you’ve 3 years from the date your return was due but your refund may be applied to the tax debt.
- File a Substitute Return: If you’ve not been filing your returns, the IRS may file a Substitute for Return (SFR) on your behalf.
You should not treat it as a complementary tax filing service because you’ll not get any exemptions or deductions that rightfully belong to you.
You should refile those years to claim your deductions which will decrease the tax debt you owe, the interest and penalties.
- Seize your Social Security: After going through the process of notifying you, the IRS has the ability to seize certain assets such as Social Security.
- Issue a federal tax lien and levy: According to IRS Publication 594, a lien is a claim the IRS makes to your property while a levy is the actual process of taking it.
However, they might not proceed with it if the seizure means you’ll be suffering economic hardships.
- Lose your credit score: Your tax liens will reflect on your credit report like any other outstanding debt.
- Serve jail time: While it’s unlikely for the IRS to pursue a jail sentence, it is still possible. Cases such as willfully failing to file returns or filing fraudulent returns are evidence of wrongdoings.
6 Steps on How to File Back Taxes
In most cases, filing back taxes is in your best interest. Whether you have one or many returns to file, you should take the right steps to get back into compliance with the IRS.
Here is what to do:
1. Collect All the Necessary Documents
You’ll need W-2s or 1099 forms to report your income and file your back taxes. Have all the information about investments and any other income that isn’t on file with the IRS.
You must also gather receipts or other records providing proof you’re eligible for deductions and credits.
If you don’t have these documents, contact your employer, former employer or a financial institution. With wages, your last pay stubs will provide the numbers you need.
2. Request for Missing Documentation
If you can’t still locate the documents, contact the IRS directly at 1-800-829-1040 or by filing Form 4506-T, a request for your wage and income transcripts from the IRS (they go back up to 10 years).
You may have to wait for up to 45 days for the IRS to process your request.
3. Download Prior Year IRS Tax Forms
Once you have all the documents, your next step should be to download the tax forms. You can only file your back taxes on the original forms for each year you’re filing.
For example, if you have unfilled returns from 2016, you need to download the 2016 tax forms and not the current form. Search through the IRS site for the forms.
4. Prepare Your Back Tax Returns
You need to follow the instructions for each year when completing your tax forms. You should know:
- The tax laws change every year, and using the correct guidelines for the year will prevent you from having to prepare your taxes a second time
- Double-check to make sure you don’t use one year’s instructions on another year
5. Sending In Your Tax Forms
Once you’ve completed the tax returns, you should send the forms to the IRS to the address listed in the Form 1040. Remember to get proof that you have filed.
If you owe money to the IRS, it is best if you include a large payment as you can to reduce the interest you owe. However, the unpaid taxes will still accrue monthly interest indefinitely until the debt is paid.
If you can’t pay the full amount of the tax debt, you should consider tax resolution services.
6. Follow Up with the IRS
Once the IRS receives and processes your tax returns, they send a notice of the exact penalty and the interest charges.
If you have experienced IRS compliance activities like collection notices, a levy, a lien, or an investigation of unfiled tax returns, you should follow up to make sure the IRS has closed the case.
Get Help from a Licensed Tax Professional
If you’re filing old IRS tax returns, you may find the State tax laws to be different. So, it’s recommended you work with an IRS Enrolled Agent who will help you to complete the financial analysis and tax investigation.
At True Resolve Tax we offer unmatched tax resolutions services. We will help you to review your income, expenses, liabilities, assets and tax transcripts to determine your best course of action when filing back taxes.