What happens if you haven’t filed taxes for 10 years?
There are a couple types of consequences to consider when you haven’t filed your tax returns with the IRS.
Consequences with the IRS
The IRS may charge you penalties and fees if you have income that you’ve failed to report on your taxes. What’s more, the income the IRS estimates you’ve made will likely be much higher than what you would have filed on your own.
This is because the IRS doesn’t account for tax credits or tax deductions you would have included had you filed taxes yourself. The IRS files a tax return on your behalf using their own accounting—and remember, they don’t have any records of your expenses like rent, equipment, and other deductions that would reduce your tax liability. Fees will then accrue on the IRS’s estimated balance.
The IRS charges taxpayers a failure to file penalty and a failure to pay penalty totaling 5% every month your tax return is late. This fee is capped at a total maximum tax penalty of 25%, however, so the total fees do not grow indefinitely.
If you haven’t filed taxes for several years, the IRS may decide to settle your tax bill by setting up a levy on your wages or bank account. This can result in a garnishment of wages or other income.
The IRS may also file a notice of a federal tax lien, which can impact your financial options in the future. A tax lien by the IRS can limit your ability to take out loans or use your credit. A lien can also limit your sale of property or assets, as the government will now have a say in your transaction and will take the tax payment owed from the proceeds of any sale.
In an absolute worst-case scenario, the IRS can punish those who have been willfully avoiding filing taxes with up to five years in prison and up to $250,000 in fines for tax evasion.
Consequences in other areas
There are many other reasons you can run into issues by not filing taxes. In addition to missing out on possible tax refunds, there are several areas of your life that require you to present your recent income tax returns. If you haven’t filed your taxes recently, you won’t have any tax returns to present!
You may be asked to show your recent tax returns when you apply for a passport, for example. You will almost certainly be asked for tax returns when you apply for a mortgage, rent or other loan. You may also be asked for your recent tax returns when you apply for health insurance.
Your own or your child’s financial aid applications for college require your most recent federal income tax returns as well. Finally, your retirement benefits, like Social Security and Medicare, are tied to the income reported on your tax returns. Failing to file your tax return for many years can jeopardize your future income.
Here’s how to get back on track after a decade of unfiled taxes.
Ready to get back on track? It’s worthwhile to take steps sooner rather than later once you’re prepared to clean up the missing returns from prior years.
Step 1 – Check your status with the IRS.
If you don’t file your taxes, the IRS will often file a Substitution for Return on your behalf. The IRS estimates what it thinks you owe, but doesn’t take into account any deductions or exemptions.
Then the IRS sends a tax notice CP3219N, otherwise known as a 90-day letter, letting you know what the agency is planning to file on your behalf. If you don’t answer the letter, the IRS will file the tax return it thinks you need to file, and then fees will start.
If you’ve gone a few years (or more) without filing your taxes, you may have received many IRS tax notification letters. If these letters never reached you, you can reach out to the IRS directly to ask about your tax filing status by calling 800-829-1040 or 800-829-4059.
Step 2 – Decide whether you want to pay or file your own returns.
If the IRS has filed substitute tax returns on your behalf, you have a choice on how to proceed. One option is to simply pay the amount of tax and accompanying fees that the IRS thinks you owe. This tax payment process is relatively simple, and the IRS does have some tax relief plans if you can’t pay the full amount immediately, including an installment agreement.
Of course, paying the tax liability and fees will clear up the issue of a tax levy, but it won’t necessarily get you the tax forms that you need for other purposes, like a new mortgage loan. Additionally, since there are no deductions on the IRS substitute returns, you’ll likely wind up paying more than you need to.
If you decide to file tax returns yourself for the missing years, you may wind up paying far less and you’ll have the tax forms you might need for future financial decisions.
Step 3 – Gather the financials to complete your tax forms.
If your bookkeeping got a bit lax during the last 10 years for which you have unfiled tax returns, you’ll need to do some forensic accounting to determine your income and expenses over the years. A forensic accountant or a CPA can help with this if you want to outsource part of the work. The things you’ll need include:
Incomplete records - Sort out all of the missing information and holes in your financial records to prepare to file. In particular your income and expenses for each year should be accurately recorded to determine your accurate income and maximum deductions and credits on your tax return.
Supporting documentation - Your receipts and income statements will be recorded in your financial records, but hang on to those and other supporting documents that might help explain why you were delayed sending your taxes for so long. Having documents to support your numbers and your delay can give you peace of mind as you work through the clean-up process.
The IRS may also be able to help you sort out some of the missing pieces for your tax situation. If you need to see the wage and income information the IRS has for a particular year, you can file Form 4506, which is a request for a transcript for old returns. Be sure to check the box on line 8. Requesting transcripts for missing years can also tell you what the IRS has filed on your behalf.
Step 4 – File the missing tax returns.
There is no time limit for submitting old tax returns, so as soon as you have the paperwork ready, you can send your missing tax forms to the IRS. Even better, if you qualify for a tax return, you can claim it for up to three years past the submission deadline.
Remember that there are two parts to filing a business tax return. The first is to submit the business tax forms to the IRS. This form will officially file your taxes and tell the IRS how much you made and how much you owe.
Step 5 – Pay your taxes, whether through a lump sum, settlement agreement, forgiveness, or offer in compromise.
The second part of filing the missing tax returns is to pay the taxes due. You can simply pay your taxes with a credit card or bank draft. Of course, if you’re filing years of tax forms at the same time, you may have a significant back tax burden to address.
Fortunately, the IRS is willing and able to work with those who can’t pay the full amount owed in unpaid taxes by the due date, even if it’s years past. There are installment plans and other options available if you can’t pay the full amount immediately.
Options for settling your tax debt with the IRS include:
Setting up an installment or payment plan for your back taxes.
Pursue an offer in compromise, which is a deal with the IRS to settle your tax debt for less than you owe (you’ll likely need to work with a tax resolution specialist, an Enrolled Agent, or tax attorney to achieve this).
Request a “Currently Not Collectible” status to delay payment until you can better afford it.
Take out a loan to cover your tax obligation.
Step 6 – Prepare for future taxes.
Before you close the bookkeeping software you used to sort out your newly updated tax forms, be sure it’s updated for future tax filings as well. A clean accounting system can make it easier to track income and expenses and to file taxes on time each year. Set up your business’s accounting now to ensure you don’t have to stress about tax issues with federal or state tax returns when it comes around this year and every year moving forward.
If you’re ready to take on years of missing tax returns, you may need some help checking your prior years of bookkeeping, updating income and expenses, and double-checking that you’re not paying more than you must. The Bench Retro team is experienced at sorting out the financials and finding tax professionals to help you file the missing returns as well.
The bottom line
Getting way behind on your taxes can be stressful. There is no need to feel paralyzed, however. Sorting out your back taxes is a matter of clearing up your bookkeeping, filing the necessary paperwork, and sorting out payments for missing taxes. The most important step you can take right now is to simply get started.