The fastest answer is how far back do you need to file? How deep do you want or need to dig into your records to get your taxes up-to-date with the IRS? Dealing with delinquent returns takes determination and patience. When I think about determination, my Dad’s dog, Copper, comes immediately to my mind. In the late afternoons, when the California sun begins to lose its intensity, Copper saunters onto her dog bed and turns herself around. With one ear flopped towards the east and the other pointed south, she digs into the corduroy of her bed. Copper prepares her bed with such zeal it looks more like a dig to Australia for some delicious chicken on the barbie than nesting for the night. So, it is time to grab your wading boots, hard hat, and work gloves. We have some excavating to do.
IRS Enforcement Actions for Unfiled Tax Returns
When someone has a filing requirement but does not file their federal income tax return, various IRS enforcement actions may start in the background. For instance, if enough income is reported to the IRS from third parties such as employers, vendors, banks, and other financial institutions, the IRS will prepare an income tax return on the taxpayer’s behalf called a
substitute for return. If you are thinking “Eureka!” and making plans never to file another federal return again, hold off on those festivities for just a bit. Substitutes for return do not take into account many deductions like mortgage interest, property taxes, and charitable contributions. They do not consider children and the associated credits that go along with claiming the little darlings. In short, substitutes for return are rarely in the taxpayer’s favor, and in most cases, the tax due is overstated. Once the IRS assesses the tax on a substitute for return, the collection statute of limitations begins. From then, the IRS has ten years to begin enforcement actions and attempt to collect the tax due. Until the taxpayer files their own return (through an
audit reconsideration) and claims any allowable deductions and credits or pays the tax due, the IRS will continue collection enforcement actions on the assessed tax due from the substitute for return.
Statute of Limitations
Only when a taxpayer files their income tax return can the statute of limitations on assessment begin. Even if the IRS prepares a substitute for return, the statute of limitations on assessing additional tax will not start until the taxpayer prepares and files a tax return for the year in question. The statute of limitations on assessment is the time the IRS has to review or audit a submitted income tax return. Generally, the statute of limitations on assessment is three years from the date the taxpayer files the return.
There are situations where the statute of limitations on assessment can be extended for up to six years. For example, if a taxpayer fails to report over 25% of their gross income on their originally filed return, the statute of limitations on assessment increases to six years. It does not matter if the omission was unintentional or not. If the IRS determines a taxpayer filed a false or fraudulent return, the statute of limitations on tax assessment is unlimited and can go through infinity. (Well, maybe not that long, but you get the idea.) This is true even if the taxpayer files an amended return correcting the fraud that was initially reported.
Receiving a Refund on a Tax Return Filed Late
When it comes receiving a refund on a tax return filed late, taxpayers basically have three years from the original due date of the return to submit the unfiled return
and receive any refund claimed on the return. Here is an example.
In 2017 Finn Fischer received a hefty bonus for being the number one lure seller west of the Mississippi River and used the windfall to travel in early 2018. So excited about his travels, he forgot to file his 2017 federal tax return by April 15, 2018. Finn would normally have until April 15, 2021, to file his 2017 federal income tax return and still receive any calculated refund.
Due to the COVID-19 pandemic, the original due date to file 2020 tax year individual income tax returns and file a claim for refund for 2017 was extended from April 15, 2021, to May 17, 2021. So, instead of having until April 15, 2021, to file his 2017 return, Finn has until May 17, 2021.
What happens if a return with a claim for refund is filed after three years from the return’s original due date? Let’s return to our previous example.
Finn returned from his travels in early 2018 and realized his true calling is to design fishing lures and decides to open an online boutique store that only sells his one-of-a-kind lures. Time flew by, and his online store was a hit. While sorting an old stack of papers, Finn discovered his W-2 from 2017 and realized he never filed his 2017 return! He prepared his 2017 return and mailed it on May 18, 2021, looking forward to receiving his $3,000 refund. Alas, Finn will be waiting, and waiting, and waiting some more for a refund that will never show. The last day Finn could file his 2017 federal return and receive the refund calculated was May 17, 2021. Finn was a day late and will now be $3,000 short.
Generally, substitutes for return are prepared by the IRS three years or more after the return’s original due date. So, be mindful that it may be too late to receive any refund shown on the return the taxpayer files. But this does not mean the effort was for naught as it may wipe out the tax that was assessed on the substitute for return. Additionally, the submitted return starts the three year statute the IRS has to audit the return and assess additional tax.
What recourse would a taxpayer have if they received a notice from the IRS stating a substitute for return was prepared with a balance due assessed for a tax year the taxpayer did not file a return and the taxpayer paid the tax? Would the taxpayer be able to file a return for the year in question and request a refund for the tax already paid if the return the taxpayer prepared has a lower tax liability? If it has been less than two years from the time the taxpayer paid the tax, they may file a return for that year, and the IRS will refund the difference between the tax the taxpayer actually owes and the payment already made. However, if the taxpayer’s return is submitted more than two years after the tax was paid, the IRS will not refund any of the overpayment. Additionally, the overpayment may not be credited to a year the taxpayer has an outstanding balance due. The amount will be considered forfeited and remain in the government coffers.
Sometimes it is Beneficial to Amend a Tax Return
Sometimes it is beneficial to amend a return even if the original return was filed years ago. When it comes to claims for refund, taxpayers have three years from when their return was filed or two years from the date the tax was paid to amend their initially filed return,
whichever is later. As previously stated, the IRS has ten years from the assessment date to collect any unpaid income tax due from a taxpayer. It is not uncommon for taxpayers to realize years later that essential information was omitted from the return that could significantly reduce their tax liability. Even if the amended return does not result in a total refund because the return was amended over three years after the return was filed, any payments made within the last two years of filing the amended return may be refunded. This strategy can be beneficial for taxpayers who are in a long-term payment plan for the tax that was assessed based on a substitute for return.
Get Current with the IRS
Even if it has been years since a taxpayer has filed a return and the statute of limitations to claim any credit or refund for overpayment has passed, it still may be in the taxpayer’s best interest to get current with the IRS. For instance, if a taxpayer is self-employed and has not filed income tax returns for years, they may think they have “escaped” paying tax, but this may be an illusion. By not paying the self-employment taxes (Social Security and Medicare), the taxpayer is not working towards the forty quarters a person needs to qualify for Social Security retirement benefits. Furthermore, not paying into Social Security impacts disability benefits if the taxpayer becomes disabled before entering their retirement years.
If years have passed since a taxpayer has filed any required federal income tax returns, it may be beneficial for them to contact the IRS and ask which returns they want to be filed. When speaking with the IRS, you also want to request Wage and Income transcripts for every year you are asked to file. The transcripts show all income reported to the IRS during the year and can be used as a road map. It is important to make sure the taxpayer’s completed return includes all of the income that was reported to the IRS.
Has a tear fallen into your tea at the thought of getting current with the IRS? Does the act of digging through mountains of paperwork alone, unsure of the documentation you need to clean up your IRS woes, compel you to want to give up and accept whatever assessment the IRS makes? Girded with an understanding of the Tax Code and years of experience working with the IRS and state tax agencies, TaxAudit’s Tax Debt Relief services
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