Per IRS estimates, more than 7.5 million taxpayers do not file a required return each year. This estimate doesn’t include taxpayers who don’t receive information statements, such as small-business owners. Add to that the growing number of taxpayers who still must file returns to continue receiving advance payments of the premium tax credit to pay for their health insurance. In all, there are likely more than 12 million people who must file back tax returns each year.
If you have unfiled returns, what does it take to get back in good standing with the IRS? There are five actions you should take to get back into the good graces of the IRS and limit the damage due to the unfiled returns:
IRS Enforcement Impact: determine IRS delinquent return enforcement history and necessary actions (if the IRS has started or completed a delinquent return investigation, you will request time to file or take actions to reverse prior IRS actions)
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Years to file: determine which years you are required to file (stay tuned, it may be less than you think)
Back records: gather the documents needed to file an accurate return (hint: the IRS can help you here)
Special filing procedures: follow any special filing procedures to file an accurate return with the IRS and your State Department of Revenue (if applicable) (careful: you may have to use special filing procedures)
Limit the damages: seek to lower penalties and get into a collection alternative if you owe can cannot pay (help with penalties are found here and collection alternative here)
The first step: Contacting the IRS
You’re committed to getting back on track with all your tax filings. Your scary first step is contacting the IRS to see what the IRS is doing on your account. Have they begun a delinquent return investigation? Who is your case assigned to (a Service Center who will send notices or a local Revenue Officer who will visit you and ask why you have not filed)? Has the IRS already filed a return for you (called a substitute for return or “SFR”).
These questions will need answers. By the way, when you are in contact with the IRS, order your Wage and Income Transcripts for the years you must file. The IRS will send your W-2s and 1099s under your SSN for each year (remember to order your spouse’s too if you are filing married filing jointly).
If the IRS has already assessed tax (i.e. filed an SFR or if you had a balance due), ask for more time to file the returns. The IRS will usually grant you a “stay” up to 21 days to file the returns.
Next: Determine how many years you must file
The most common mistake made by people who have not filed in a very long time is to file too far back. How many years back are you required to be filed to be good standing?
The answer lies in a little-known IRS rule.
IRS Policy Statement 5-133, Delinquent Returns – Enforcement of Filing Requirements, provides a general rule that taxpayers must file six years of back tax returns to be in good standing with the IRS. The policy also states that IRS management would have to approve any deviation from that rule.
Sometimes, IRS managers will require tax returns from even further back than six years, depending on:
The degree of flagrancy
A history of noncompliance
The impact on future voluntary compliance
The existence of income from illegal sources
Whether there is minimal or no tax due
IRS costs to secure the return, versus anticipated tax revenue
When you contact the IRS, you can ask them how many returns must be filed – if they say more than 6 years, ask them why and remind them of Policy Statement 5-133.
Back to enforcement, the IRS is most likely to divert from the Policy Statement if the IRS has assigned a local Revenue Officer to enforce the filing of the back returns, there is a large potential liability (i.e. asset sales, income without withholding, no estimated tax payments), or if there is a business involved.
Next: File accurate returns to the right place at the IRS
One important note: the IRS does not pay old refunds. You can recoup refunds only for returns filed within three years of the due date of the return. Refunds for prior years are lost and can’t offset any balances due.
It’s essential to prepare an accurate return that matches IRS records. With back tax returns, you should trace your income history. Without this match, the IRS can question the accuracy of your client’s return. Also, if you made estimated tax payments that can be credited to any balances owed, get your account transcripts to verify the amounts your client paid.
You also must file the return with the proper IRS unit. Returns without prior enforcement go to the regular filing location. Returns that have SFR activity must be filed with the IRS SFR Unit who will put the return through special processing before accepting. Sending to the wrong unit can delay processing for several months.
Last Step: Address penalties and any balances owed
There can be substantial penalties on balance-due returns:
Failure to file penalty (5 percent per month, max of 25 percent).
Failure to pay penalty (0.5 percent per month, max of 25 percent); combined with failure to file penalty, together they can reach a maximum of 47.5 percent.
Fraudulent failure to file penalties triple the normal failure to file penalty – increasing the maximum penalty from 25 percent to 75 percent.
You should request penalty abatement if you qualify. With most late filed tax returns, you can request that the IRS not assert applicable failure to file or pay penalties on balance-due returns. There are two reasons primarily used for non-assertion or abatement: first-time abatement for the first year if you have a clean compliance history in the prior three years or reasonable cause arguments for late filing and payment.
Remember, if you cannot pay, there are several types of agreements, depending on your circumstances. If you don’t address the outstanding amounts owed and establish some type of payment plan or collection alternative with the IRS, a second wave of IRS enforcement will follow: the IRS attempting to collect on the debt owed.
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If you think that you may need help filing your 2018/2019 tax return or past due tax returns, you may want to partner with a reputable tax relief company who can help you get the max refund and reduce your chances for an IRS AUDIT.
Advance Tax Relief is headquartered in Houston, TX with a branch office in Los Angeles, CA. We help many individuals just like you solve a wide variety of IRS and State tax issues, including penalty waivers, wage garnishments, bank levy, tax audit representation, back tax return preparation, small business form 941 tax issues, the IRS Fresh Start Initiative, Offer In Compromise and much more. Our Top Tax Attorneys, Accountants and Tax Experts are standing by ready to help you resolve or settle your IRS back tax problems.
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