How far back should I go on my unfiled tax returns?
You have not filed your tax returns with the IRS in years, and want to put that behind you and make amends with the IRS.
But how many years of nonfiled returns do you need to prepare to become compliant with the IRS?
It seems so overwhelming – where do you start?
The good news is that the IRS does not require you to go back 20 years, or even 10 years, on your unfiled tax returns.
In most cases, the IRS requires you to go back and file your last six years of tax returns to get in their good graces. And then, to make arrangements on payment of what is owed.
That’s right, a fairly reasonable and more manageable six years and working with IRS collections on payment options.
The six year enforcement period for delinquent returns is found in IRS Policy Statement 5-133 and Internal Revenue Manual 188.8.131.52.18.
Part of the reason the IRS requires six years is manpower – the IRS cannot administer and staff the enforcement of unfiled tax returns going back as far as 10 or 20 years. And believe it or not, the IRS’s records rarely, if ever, go back that far. The IRS is looking to draw a line in the sand that is consistent with their internal resources, and at the same time secure a good faith effort at compliance from taxpayers to get current. And that line in the sand is six years.
As for payment of what you will owe after the returns are filed, the IRS offers several programs, including installment agreements, offer in compromise settlements, and even currently not collectible status (where the IRS agrees not to enforce collection of your tax debt as it would create a financial hardship). In some situations, bankruptcy can eliminate what you owe on the returns, too.
Bear in mind that this is a general rule, and will likely apply to most taxpayers who seek in good faith to come forward to the IRS on their unfiled tax returns. The IRS can seek enforcement of longer periods if there are unique circumstances, such as income from illegal sources or hiding or concealing assets. That is the exception, not the rule.
Indeed, not filing your tax returns is most always a civil issue (not criminal) that simply requires (1) filing the last six years’ tax returns and (2) making arrangements with the IRS to repay what you owe.
If you do not have all the records to prepare the returns, the IRS will often have copies of your W2s, 1099s, etc. There are also methods to recreate your income and business expenses if your records are incomplete – one way, for example, is to determine your living expenses for any year you did not file. You likely earned at least what you spent, and that forms a basis to recreate your income for a good faith tax return filing.
And criminal nonfiling cases are the exception, not the rule. In most every case, the IRS simply wants you to voluntarily file the last six years returns, and then work with them on an agreement to pay or settle what you owe. Criminal cases usually involve a level of sophistication and planning on your part that would show an intent beyond the good faith reason why you probably did not file – poor recordkeeping, medical trauma, divorce, fear or procrastination.
You do not have to be held back by unfiled tax returns. The path to a fresh start is the last six years’ returns, and providing the IRS a plan of repayment. You do not have to be in a state of fear and inaction from the prospects of getting this behind you, and moving on. It can actually be more manageable than you may think.