Delinquent Tax Returns

We often get calls from individuals that haven't filed a tax return in years.

The first question we are usually asked is "Will I go to jail?" Except in very rare cases, no. What the IRS wants is for you to file the delinquent returns. It's possible that the IRS has already filed returns for you. Under section 6020(b) of the Internal Revenue Code, the IRS may file a Substitute for Return (SFR) when you don't file a return on your own. An SFR is usually not a good thing since it is calculated at Single or Married Filing Separate rates even though you may be qualified to file Married Joint or Head of Household. However, since the IRS has no return, they choose the highest tax rate, not the one you would choose for yourself.

The IRS also doesn't give you dependents you would ordinarily claim. If you have four children, it doesn't matter. Because the IRS files for you, you only get your own personal exemption. You also don't get the benefit of any itemized deductions such as mortgage interest, state or property taxes you paid, charitable contribution or health care expenses. Why? Because the IRS basically takes your income, taxes it at the highest rate, deducts any Federal tax you paid and that's that. And it can get worse. If you have 1099 (self-employed) income, you don't get any business expenses.

If the IRS has already filed an SFR, that isn't the end. While the law doesn't force the IRS to accept a return you file after an SFR has been done, I have never seen a case where the IRS hasn't accepted the return. Once the IRS accepts the return, the tax is reduced to what is shown, but of course, penalties and interest still apply. However, because the tax is reduced (often by a huge amount) the penalties and interest are reduced as well.

What about if the IRS hasn't filed a return for you? The same basic rules apply. Simply file a return just like any other one. If you don't have the information to file (W-2s, 1099s etc.), in most cases we can get the documents from the IRS. It takes up to 45 days, but the IRS usually has wage and withholding information going back at least seven or eight years.

For some of you, no records are available because no 1099s or W-2s were ever issued. This is often true for sole proprietors. In that case, hopefully  you have records to show your income and expenses.  We'll also use bank statements if you have those available. Assuming that all of your income was deposited into your bank account, that is a good way to track your income, too. If you can't produce those records, all is not lost. I recommend that my clients "back into" their net income by estimating what it would have taken for you to meet your monthly expenses. For example, let's say that you have no records for 1995, but you know that your rent was $1,000 per month, you had a car payment of $200, insurance was $50, food and clothing averaged $300 per month, etc. We'll add up those monthly figures and multiply by 12. It isn't the greatest way to file a return, but it works in a pinch.

If you are due refunds, filing the returns will close your case. Under current law, refunds more than three years old are lost nor can they be applied to other tax due. If you owe taxes, penalties and interest will be tacked on. The failure to file penalty is a maximum of 25% of the tax due on each return. It is not unusual to see the penalties and interest exceed the tax due on returns more than 3 years old. In fact, if the taxes go back 10 years, the total may be 3 or 4 times the tax due. For more information on your options, visit the Installment Agreement or Offer In Compromise pages.