I have written about unfiled tax returns quite a bit. The reason? Many Americans don't file tax returns on time and a good percentage of those people have failed to file returns for several years or more.
If you haven't filed in quite a while and have questions, this article will provide answers to most of them and help you to avoid searching our blog for each answer individually.
What is the Statute of Limitations on Unfiled Tax Returns?
If a tax return hasn't been filed, there is no formal statute of limitations period. In theory the IRS can continue to ask you for a return indefinitely. But it doesn't for two reasons:
a. The IRS will usually do a tax return for you at some point, using the income information it has gather from your employer and other sources.
b. If you haven't done the return for several years and the IRS hasn't done it for you…it may not be requested as a pre-requisite to dealing with your tax problem. In other words, the IRS may only demand 7 years of returns to consider you to be “in compliance” or back in the system and it may simply ignore the older years.
If I haven't filed a tax return for several years, do I need to file all of the missing returns?
If you haven't filed for a long time, the IRS will typically tell you how many years you need to file in order to be considered “compliant” or back in the system. That time period shouldn't be more than 7 years.
If the un-filed return is older than 7 years and the IRS hasn't done a substitute return, you may not need to file it.
If the IRS has done an old return for you, you may want to do your return if the correct return will reduce the debt substantially and if it makes sense to do so in relation to the IRS statute of limitations on collection.
What if I can't pay the tax I owe on a missing tax return or several missing returns…should I file them?
Although rarely prosecuted as a crime by itself…failing to file a tax return is a crime and owing a tax debt isn't.
If you are trying to settle a debt with the IRS or arrange a payment plan, it will demand certain missing returns are filed before it allows you to proceed.
I am going to file for Bankruptcy; do I need to file tax returns?
Certain returns have to be filed in order to obtain a discharge in your bankruptcy case generally. Income tax returns should be filed as one element or requirement to discharging your obligation in bankruptcy on the debt. Your bankruptcy Attorney should be able to help you determine which returns need to filed for purposes of the bankruptcy case. An Attorney experienced in both tax and bankruptcy should be able to tell you which returns need to be filed in order to obtain a discharge of the tax debt obligation in the future.
If I have unfiled tax returns do I lose my passport?
It is possible. You won't be denied for owing tax debt though but the Government State Department does review and discuss with the IRS to see if your returns are missing.
Do I have to file to claim a Refund?
Yes. The IRS isn't going to issue a refund to you unless the return is filed.
Is there a time limit on filing a return that will cause me to lose my refund?
If you are due a refund, you only have a short period of time to claim it. There are two different rules at play.
1. Two Year Rule
If you paid the IRS money or the IRS took money from you for a debt related to a substitute return, and you file the return within two years and you don't owe or owe less than the IRS received, you should get the money back. If you wait for more than 2 years, the IRS keeps it, unless the Three Year Rule applies.
2. The Three-Year Rule
If you haven't filed a tax return and it has been 3 years since it was due, you will lose your refund. You will lose it no matter how large the refund was.
So you have until the later of three years form the date of the original deadline to file the return or two years from the date the tax was paid to claim a refund of overpaid tax from the IRS.
Your 2012 tax return was due with an extension on October 15, 2013. You will have until October 15, 2016 to file a return and get your tax refund. If you file your return one-day after that three-year period expires, the refund is lost.
If you filed a return, you can claim any additional refunds by amending within three years from the original return due date.
What if I don't have all of my information to create the missing return(s)?
You can retrieve and/or recreate information necessary to complete a return. The old 1099 and w-2 information can be retrieved from the IRS. Old property tax bills can be retrieved from the City you live in. Profit and Loss statements can be created using old bank statements. Mileage logs can be recreated using a calendar that you may have had for the year.
The law only requires you to file a return that is based on the “best of your knowledge” standard. The return doesn't have to be 100% accurate.
Is the IRS going to penalize me for failing to file a tax return on time?
The penalty is larger than the failure to pay penalty. It is wise for that reason if you know you will owe to file the return on time.
Will my failure to file tax returns make the debt non-dischargeable in Bankruptcy?
One of the basic requirements to treat income tax debt as dischargeable in bankruptcy is that you file the tax return more than two years before you file the bankruptcy. If the IRS files a substitute return for you first, the principal portion of the tax debt may never be dischargeable in bankruptcy.
Whenever we see a client who has several years of missing tax returns and we know that the debt related to those returns will be large, we suggest that the returns be filed quickly in order to beat the IRS to the punch and to preserve the ability to treat the debt as fully dischargeable in bankruptcy later on.