IRS Law Blog

What if you have not filed your taxes in years, but have paid taxes to the IRS all the while? In other words, you have unfiled taxes, but probably do not owe the IRS much of anything because your employer took taxes out of your paycheck. How much trouble could you be in with the IRS?

The good news is you likely are not in much trouble at all if you have not filed and do not owe any money to the IRS.

Here’s why:

• You are not going to jail for not filing the tax returns.  The IRS likes to prosecute people who do not pay their taxes.  That’s not you.  You paid your taxes, but just did not file your returns.  There is a difference, and the difference takes you out of any IRS criminal exposure.

• No IRS any penalties for not filing your returns. Common penalties are for late-filing, late-payment, and not making estimated tax payments. The amount of the penalties can be as much as 20-25% of the tax owed on the return. The key here is the phrase tax owed on the return.  You had withholding, paid your taxes, and do not owe any tax on your returns.  Since the penalties are calculated on money owed, you will not owe the IRS any penalties – even for not filing the return on time.

• There will be no interest charged to you.  The IRS likes to charge interest – but it needs money owed to calculate the interest charges on.  If you do not owe the IRS, and have a refund on the returns, regardless of how long it has been since they were to be filed, you will not owe the IRS any interest.

• No IRS levy or property seizures.  The IRS can’t take your stuff if you do not owe them money.  If they are trying to take your stuff, the original returns need to be filed so the IRS knows there are no balances due and you have refunds.  Any levies should then be immediately released.

• You do not have to go back forever on the unfiled returns.  There is a limit on how far back you have to go to get in compliance with your filings.  You do not have to go back forever. In most every case, filing the past six years’ tax returns will bring you into the IRS’s good graces.  See IRS Policy Statement 5-133 and Internal Revenue Manual 4.12.1.3.

• You may be off the IRS’s grid.  The IRS may not even be looking for your returns.  You may not even be on the IRS’s radar.  Here’s why:  Your employer reported your earnings and tax withholdings to the IRS.  The IRS’s computers know what you have earned, and that you have not filed.  But the computers may also see that you had enough withholding, and if you filed, the IRS would owe you.  And guess what?  The IRS does not notify you when they think that they owe you money.  The IRS only comes after you when they think you owe them.

Here is some so-so news that can be turned into good news:

• The IRS may owe you money on those unfiled returns, and they can pay it to you if you get the returns filed.  And you want that money.  But for the IRS to pay it to you, you need to get those returns filed.  The IRS won’t pay you unless you file.  Filing the returns with refunds leads to good news.  If the IRS owes you, and you have not filed, they will pay you the refunds for the last three years.  And they will pay you interest on those refunds.  Unfortunately, the Internal Revenue Code prevents the IRS from paying you a refund that is more than three years old.

• You may have received a bill from the IRS stating that you owe money to them for the years you did not file.  This may be wrong, but the IRS can do this – estimate your liability when you don’t file, and bill you for it.  The technical IRS term for it is a Substitute for Return, with the acronym SFR.  When you don’t file, and the IRS files for you, they often get it all wrong. The IRS will not give you the correct filing status, the right tax rates, will usually allow no dependents, and will not give you a deduction for mortgage interest, or charitable contributions, or employee business expenses, or your business expenses if you are self-employed.

• An IRS substitute return can be corrected by preparing the original returns and filing them with the IRS.  In most every case, the IRS will accept the right numbers – yours – and allow you all the deductions you are entitled to.  The result is the IRS changing your return from a balance due to a refund, or in the very least, to a smaller, correct amount owed.

In summary, if left to their own devices, the IRS may determine that you are owed money, and never pay it to you if you do not file your returns.  Or they may incorrectly think that you owe them money, make a substitute return filing, and bill you for it.  Preparing and filing past due tax returns can not only get you the refunds, but correct erroneous IRS actions in estimating your taxes.