Delinquent and Unfiled IRS Tax Returns

Delinquent and Unfiled IRS Tax Returns

Filing a tax return each year is one of the most complicated financial commitments wage earners must make. This is especially true if you are a small-business owner receiving 1099s. The process can be extremely complex.

Many taxpayers often look forward to tax season when they are due to receive a sizable refund; others, like the self-employed, often delay the process with a large tax bill that they cannot afford to pay.

When a taxpayer knows that filing their taxes will result in a tax bill they cannot afford, it is natural to want to not file out of fear. However, not filing is one of the worst mistakes that a taxpayer can make if they owe back taxes.

What are the Consequences of Not Filing?

The consequences of not filing your tax returns can be severe and place the delinquent taxpayer in serious jeopardy.

Failure to file your taxes is considered a crime!

After prompting by the IRS, refusal to file your taxes can be considered a type of tax evasion.

The IRS will send a series of notices, CP515, CP516, CP518, and CP515B letters in sequence until you file.

If you refuse to file for a long period of time, the IRS will eventually file for you. It is called a “Substitute for Return” (SFR). They will take all the income items from your IRS transcript and list them as income, allow no expenses or itemized deduction, treat you as a single taxpayer regardless of marital status, assess the tax, and begin collections. Since this is not an actual return, it is not considered a return for Bankruptcy purposes nor will it start the clock on the audit statute of limitations. It is a worst-case scenario and typically highly inflated tax debt.

Starting on the day after the due date of the return, a late penalty of 5% is accessed on to your owed amount for every month you fail to pay the inflated debt, capping at 25% per year. When you hear people talk about they could pay their tax debt if it weren’t for the penalties, this is what they are talking about.

Because millions of taxpayers fail to file every year, the IRS cannot prosecute each delinquent taxpayer. Instead, the IRS pursues tax evasion charges against a few average taxpayers and those more blatant cases each year. Note, you do not have to be Wesley Snipes to get the IRS’ attention. Each year, usually around April 15th, the IRS publically pursues tax evasion charges on a few average taxpayers as a deterrent to others. The point is not to be the poster child for tax evasion.

As part of the IRS’ collection process, they may file a Tax Lien, hurting your credit and limiting your ability to obtain a loan. Over time, the failure to file your taxes can result in the levy and lien of assets, fines up to $25,000, and/or even jail time.

The IRS will take the refund up to the prior highly inflated tax debt if you file a subsequent return with a refund. The IRS will continue to do this every year until the debt has been paid. In a year where not all of the refund is taken, it will severely delay the tax refund.

Tax Refund Forfeiture

Yes, it is still possible to receive a refund on your back taxes. However, to claim a refund, you only have three years from the return’s due date or two years from the date paid. If you delay longer than this, under the Statute of Limitations, you forfeit your right to claim a refund.

In 2019, more than $1.4 billion in taxpayer’s refunds went unclaimed.

Late Payment Penalties

As f you do not file your taxes and fail to file for an extension by April 15th, late penalties will be assessed.

If you have a tax bill after you file your taxes and cannot pay by April 15th, late penalties will still be applied to your balance, but they won’t be as severe as the failure to file penalty.

A variable rate of 0.5% to 1% (1% once the IRS starts sending notices, .5% once on an Installment Agreement) of your unpaid taxes will be charged on your principal amount for every month that tax debt goes unpaid.

If you need more time to file your taxes, consider filing for an extension. This will extend your filing tax due date to October 15th and avoind the failure to file penalty; however, you will need to give yourself ample time to file the paperwork and get approval for the extension.

As you can see above, the failure to file consequences, penalties of up to 5% per month, potential tax evasion charges, and SFR are much more severe consequences than the penalties for failure to pay, half a percent to 1%. The moral of the story, file even if you cannot afford to pay!

A Notice of Deficiency and aggressive collections.

Reason for Filing

Difficulty obtaining a job.
Wage and/or Social Security Income garnishments.
Bank levy
Ineligibility for student loans.
Damaged credit
Tax settlements (installment agreement, Offer in Compromise) are barred due to non-compliance.
Failure to file tax returns may be construed as a criminal (misdemeanor and potentially a felony!) act, punishable by one year in jail and $10,000 for each year not filed.

It's one thing to owe the IRS money, but another thing to potentially lose your freedom! Let get those returns filed, so you can sleep at night.

WARNING: Filing a bunch of back returns without a plan of action is financially disastrous.

Filing a bunch of back tax returns, with balances owed, could spell financial disaster without a plan of action, in place, to resolve the balances due. Without an advanced plan of action, the IRS or State will aggressively collect the debt. This will likely place you in a worse position than before you filed the returns. You have to file the return or they will file Substitute for Returns. That is why it is absolutely critical that you work with a experienced Certified Tax Resolution Specialist to develop a comprehensive plan of action!

Don’t Let Lack of Records Stop You from Filing.

At Legacy Tax & Resolution Services we have a direct portal into the IRS system that allows us to retrieve IRS transcripts WITHOUT raising any red flags. This service is grant only to select users and is a direct connection to confidential taxpayer records. Understand that we cannot access this information without your signed consent.

Cannot Pay the Balance Owed.

All is not lost. Once in compliance by filing all returns legally required, you would NOW have a host of tax resolution options potentially available to you. The potential options would include; payment plan and installment agreements, abatement of penalties, Offer in Compromise, bankruptcy and currently not collectible status.

For more information on Delinquent and Unfiled Tax Return, see Frequently Asked Questions- Unfiled Tax Returns

If you feel that you can handle this on you own but perhaps need some guidance, check out our DIY site for the

DIY Unfiled back returns Guide

If you feel like you’re in over your head and need representation, check out the link below. There you will be able to reach out us for one of our Tax Resolution Specialists to take this burden off your hands