Non-filers: “I haven’t filed in years. What do I do?”
A common issue that Safeguard Law, PLLC handles is non-filing tax returns—when people or businesses haven’t filed in one or more years. By official estimates, approximately one in ten people who is required to file a tax return do not file. There are a few common and understandable reasons for this:
Fear of the tax bill and being unable to pay it
An illness or family death around tax season
business troubles, making bookkeeping unaffordable
Being overwhelmed at the by the multitude of documents required to file for some taxpayers
What Happens if you don’t file?
Regardless of your opinions on taxes and the IRS, you should pay your taxes every year. Filing and paying means you’re making money, can prove that your business is viable (enabling things like loans). Aside from these, there are three main reasons to file your taxes:
It’s a crime not to file
In addition to the tax, you’ll owe additional penalties (potentially an extra 25%)
The IRS will file returns for you, and will refuse to do you any favors—increasing your liability
Don’t Go to Prison because you didn’t file
Prosecuting non-filers is an easy case for the Government. They essentially just need to prove you didn’t file and you knew you had to.
The Government doesn’t have the time or resources to prosecute every non-filer case. But to eliminate the risk of going to prison for years, just file your taxes.
Nevertheless, the IRS can’t prosecute you forever. They can only charge you criminally within six years of the date the return was due. Returns due 10 or 15 years ago are beyond the criminal statute of limitations. You don’t have to lose sleep thinking you’ll be charged for not filing these returns.
Avoid Penalties and Interest
There are financial incentives for filing your taxes as well. The IRS penalizes non-filers, making it more expensive to not file than to pay your original taxes. There are three penalties for non-filers:
Failure to file
Fraudulent failure to file
Failure to pay
The fraudulent failure to file penalty, is a 15% penalty per month, up to 75% of the tax due. Without even considering interest, you are doubling your IRS bill.
The general failure to file penalty is 5% per month of the tax due, up to 25%. The penalty starts as soon as the return is late. If you did not file an extension, the due date is April 15 for individual taxpayers. You can file an extension and have until October 15 to file the return. But the extension must still be filed (and the tax paid) by April 15.
Besides the failure to file penalty, the IRS will also hit you with a failure to pay penalty. The failure to pay penalty is 0.5% per month, up to 25%.
The IRS Will Eventually File for You—But You Don’t Want That
The IRS has the authority and ability to file for you if you do not file your tax returns. The IRS calls it a substitute for return or SFR. It’s
created by taking information they have in your file, such as W2’s sent by your employer.
If you don’t respond to notices alerting you to the fact that the IRS is preparing an SFR, the liability can become final, and the IRS can then collect on whatever number they determine you owe. Even if the number is not right, the IRS can still collect on the liability. You need to respond to these notices (or, really, any notice from the IRS).
There are many downsides to an SFR filing. You will not be able to file bankruptcy on taxes due from an SFR. In addition, if you are married, you will receive none of the potential benefits of filing Married Filing Jointly under the SFR program. The SFR does not consider many credits, exemptions, and deductions. The tax owed from an SFR is usually substantially more than if you voluntarily filed a tax return. Even if the IRS uses an SFR to determine your tax liability, you can usually undo this through the IRS’s audit reconsideration process. This is a very time consuming and expensive process, so you should take every effort to avoid this and just file your tax returns.
But How Will They Know
Perhaps the less risk-averse non-filer will still not file, even when facing criminal prosecution and substantial penalties. “How would they even know?” they might ask.
There are a few different ways the IRS finds non-filers. First, remember the W2 or 1099 you receive at the end of the year showing your income? You’re not the only one who gets a copy. The IRS receives a copy as well from your employer. Using its computer system, the IRS can easily spot non-filers and start sending notices. They always get their pound of flesh.
Second, non-filers can be turned in by whistleblowers. Maybe you aggravated an employee or significant other. Maybe you have a loose tongue and bragged about “getting away with it for years.” In any case, people can turn you into the IRS, even if you would have escaped scrutiny otherwise.
Filing Late Returns
Filing returns that are years late can be an intimidating prospect. Records are lost, misplaced, or need to be dug out of a storage closet. Often non-filers don’t even know where to being (although, luckily, some records are electronic, making this somewhat less of an issue). Here are some helpful steps non-filers can take to get in compliance:
Step 1 for Non-filers: Reach out to the IRS
It’s said about a lot of things, and it’s true here: The first step is the hardest. It is an intimidating endeavor to call the IRS—the same IRS you’ve been hiding from for years—and discuss your situation. But it’s a necessary step to ensure you and the IRS are on the same page regarding what needs to be done.
Maybe you sent in a tax return in 2015, but the IRS never got it. Or maybe you’re at risk of collection activity because of an old balance or because the IRS filed a return through the SFR program. Often, the IRS will only require the last six years of tax returns, even if your non-filing goes back even longer. But for you and the IRS to be on the same page, they need to be contacted.
Should I Really Call the IRS?
I can’t say whether it’s a good idea for you to call the IRS, but someone needs to call. If you’re concerned about it being a criminal case or worried you might give incriminating evidence over the phone, you should have an authorized representative call on your behalf.
When you reach out to the IRS, they will have lots of questions for you, and you’ll have lots of questions for them.
Be polite. The person you’re speaking with is working in a high-volume call center. You’ll get further with them with kindness than with an aggressive, demanding style.
Be forthright. Tell them you’ve fallen behind in filing, but you are now trying to fix the situation. They will appreciate the honesty.
Be Prepared for Questions. What’s your current address? Are you working? Where? What’s a good phone number for you? Where do you bank? These are some of the questions the IRS may ask. Some of it is harmless, like your address or phone number. Other information could help the IRS with liens and levies immediately or down the road. Never lie. Besides being a crime, it’s a bad idea. Dance, if you can. Maybe you need to look through records to get the information or maybe you honestly don’t remember. Don’t guess. This is one of the major benefits of hired helped. It’s believable for an authorized representative not to know where you bank. But for you? Not so much.
Write it down. Write down the employee’s name and identification number. It won’t necessarily help if you’re given wrong information, but it will at least help prove a call has taken place. Ask them what years you need to file and if you owe any balances. Write down the years you need to file and the years you owe for. Ask them the address the returns need to be sent to. Sometimes, different years will need to be sent to different addresses. Other times, you’ll be given a fax number to send the returns to.
Trust, but verify. I’ve been given wrong information by IRS representatives—it happens. You cannot merely rely on what’s told to you over the phone. Request copies of your account transcripts and wage and income transcripts. Account transcripts will show what years you filed or didn’t file, what years the IRS filed for you, tax due, penalties, interest, and information to determine the statute of limitations. Your wage and income transcripts will show all the information reported to the IRS by third parties, such as W2s and 1099s. This is vital information you will need to prepare the tax returns.
The account transcripts and wage and income transcripts can be faxed or mailed to you. Try to have them faxed. This will speed up the process. You can also access these documents online at www.irs.gov by logging in with your free IRS account.
More time. At the end of the call, sincerely thank them for their time, and ask them for a 60-day hold. The hold will prevent the IRS from taking collection action if you owe from other years. It will also put a hold on the IRS process for filing returns for you. These are informal holds—if the IRS employee doesn’t properly input it into the system, the IRS could still act. Generally, the IRS will give you at least 30 days to file the return but asking for 60 days doesn’t hurt.
What am I Requesting?
-Years you filed or didn’t file.
-Balances due.
-Account Transcripts.
-Wage and Income Transcripts.
-Address to send the returns.
-Hold.
Step 2 for Non-filers: Start Gathering Your Documents
While the wage and income transcripts will provide much-needed information to help complete your tax return, it’s not all-inclusive. If you did contract work for someone but were never issued a 1099, the IRS won’t know about it. Just because the IRS doesn’t know about it, doesn’t mean you get to not report it.
Other items like dependent children, deductions for your schedule C business, basis on the sale of capital assets and many other items that can reduce the tax owed are not on the IRS transcripts.
Contact your bank and request bank statements for the years you are filing. You may want to request canceled checks as well if you think there’s lots of deductions in there. Obtain your credit card statements. If you’re self-employed, don’t be afraid to reach out to vendors and request copies of invoices.
Don’t worry about gathering every receipt and invoice. After all, the IRS gave you a deadline to file the returns. Step 2 is to get the ball rolling and build on the momentum of Step 1.
Step 3 for Non-filers: Prepare the Returns
Non-filers have two choices to get the returns done. You can prepare them yourself or have someone prepare them for you. I highly recommend the second option.
Technology has come a long way and it’s easier than ever to file your returns online. However, many people do an incredibly poor job preparing their own return.
If your return is extremely simple—you’re a W2 wage earner and are taking the standard deduction—you can probably get away with filing yourself. If you qualify, you may even be able to file your returns for free.
But everyone else should really be using a professional to prepare the returns.
What if I run out of time?
You’ve called the IRS, started gathering your documents, and contacted a CPA or Enrolled Agent for help. But you’re still waiting on cancelled checks from the bank and sorting through old receipts. What do you do when your hold date expires? Call the IRS back and explain the situation. Tell them you’ve hired help, but it’s taking longer than expected. Ask for an additional 30 days. They can say no, but they rarely do. They appreciate you’re working hard to resolve the issues.
Step 4 for Non-filers: Mail or fax the returns
In Step 1 for non-filers, you obtained the address to send in the missing returns. You may have also been given a fax number to send them in. If you fax them, keep the fax confirmations. If you mail them, mail them certified mail. You’ll want proof they were sent and on what date. It’s not unheard of for the IRS to misplace tax returns.
Step 5 for Non-filers: Call them Back
After you’ve faxed the returns in or sent them certified mail, call the IRS back. Let them know the date they were sent. At this point, the IRS will likely put an extended hold on the account—usually 90 days to allow time for processing.
Warning: Never Let a Hold Expire
Let’s say you call the IRS and they give 90 days for the returns to process. Calendar the expiration date and make sure you call on that date and ask for more time. Failure to do so could result in collection action or other action taken by the IRS.
Step 6 for Non-filers: When the returns have processed
Once the returns are processed, you’ll likely have a balance due. There are a few different options to resolve the balance, such as currently non-collectible status, installment agreements, and an offer in compromise. But don’t wait to act—you want to make sure take action before the IRS starts levying your account or filing liens.