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If you fall behind on filing your taxes, it can become a much bigger IRS issue. Taxpayers who have not filed a return may receive notices and penalties, and those who have not filed for several years can find themselves in trouble: facing the possibility of substitute returns, tax assessments, liens, levies, and problems obtaining tax debt relief.

Fortunately, unfiled returns do not necessarily mean that the IRS tax debt cannot be worked out. But complying with filing requirements is typically a first step.

When five years of missing returns, it should be discussed thoroughly before submitting paperwork to the IRS. No, the idea is to see which returns are truly necessary, what income has already been reported to the IRS, if the IRS has substitutes, and which resolution is best for your finances.

Before seeking most IRS tax resolution options, you should deal with your missing returns first, in general.

For instance, in order to consider an Offer in Compromise (OIC), the IRS will require that the taxpayers have filed all of the necessary tax returns. In addition, you will typically have to make estimated tax payments for the current year.

This does not mean you have to pay any and all of the taxes that are due before filing the missing returns.

Rather, it is usually a process that involves:

1. Ensuring that all tax years are identified.
2. Collecting wage data, income data, and payment data.
3. Properly preparing delinquent returns.
4. Submitting those returns to the IRS.
5. Estimating the tax consequences.
6. Reacting to penalties and interest.
7. Selection of an adequate collection-resolution approach.

Possible solutions to consider include an installment agreement, currently not collectible status, penalty relief, and an Offer in Compromise.

A five-year break can present a number of issues.

The IRS gets income data from employers, financial institutions, businesses, and others who report it. The IRS might also check the return against its records and initiate nonfiler compliance action if it is missing.

Notices may be sent to you asking for the missing returns. The IRS can take further enforcement measures if the others are ignored.

Potential consequences include:

• Failure-to-file penalties
• Failure-to-pay penalties
• Accruing interest
• Failure to receive a refund as a result of loss or delay.
• IRS substitute returns
• Formal tax assessments
• Federal tax liens
• Levies on bank accounts and wages.
• Additional collection activity

The longer it takes the situation to be resolved, the more complex the account becomes.

But only five years of non-filing doesn’t guarantee a tax bill each year. A few taxpayers find they have rights to some refunds for years, and others may be due large amounts due to their tax returns.

This is why it’s essential to have the real tax history.

Yes. In some cases, the IRS can file a Substitute for Return (SFR) if a taxpayer does not.

The IRS will likely rely on the data it already has on hand, including wages reported. But some deductions, exemptions, or credits may not be included on an IRS-prepared substitute return that you would have been able to claim on your own return.

That can create a tax bill that is a lot higher than what is determined by a properly filed return.

For instance, an SFR may not take into consideration business expenses that may be available to a self-employed taxpayer but were not reported on the SFR.

If the IRS has already prepared an SFR, then if your return was accurate and up-to-date, you may be able to fix the return.

For those who have had a substitute return filed, the IRS recommends that the taxpayer still file the return, as the taxpayer may claim deductions, exemptions, or credits that were not included on the substitute return.

A CP3219N Notice of Deficiency typically gives you 90 days to either file the return that you missed or petition the U.S. Tax Court.

No, don’t ignore such a notice.

Generally, yes.

Consider one of the most significant rules for taxpayers who are thinking of filing an Offer in Compromise.

The IRS states that an OIC is not considered until the taxpayer has filed all the required tax returns and met other requirements.

As a result, an OIC is likely to be returned if it is submitted when returns are not filed.

The returns will be filed first, as well, which will give you a better understanding of what your actual liability is.

The OIC is not a mere request to lower an IRS bill. The IRS considers the following:

• Income
• Monthly expenses
• Asset equity
• Ability to pay
• Reasonable Collection Potential

Many times, the IRS will ask whether the offer is what it is able to reasonably expect to receive.

Without knowing the underlying tax liabilities, it is not possible to calculate an OIC with any certainty.

Here, filing and payment should be considered as two distinct matters.

Generally, do not avoid filing due to inability to afford the resulting tax bill.

After returns are filed and after you have filed for bankruptcy, there are a number of collection options to consider depending on your situation.

• Installment Agreement

An installment agreement lets qualified taxpayers pay their tax debt in installments instead of paying it all at once.

This may be better suited for someone who has a regular income and can afford to make monthly payments than an OIC.

• Currently Not Collectible

You might be eligible for Currently Not Collectible (CNC) if payment to the IRS will not be able to meet your requirements for living expenses.

Typically, the tax liability is not removed by the granting of the CNC status. Rather, the IRS ceases collection of the tax during a temporary period, if the taxpayer satisfies the applicable conditions.

• Offer in Compromise

An OIC can be used to settle taxpayer debt with an OIC for less than its full amount.

The IRS takes into account the taxpayer’s financial situation, such as their income, spending, and assets.

Larger tax balances do not necessarily make an OIC the best solution.

What about Penalties and Interest?

Failing to file tax returns may have several financial implications

Failure to file and failure to pay penalties and interest may continue to accrue on unpaid tax and some penalties, and the IRS might impose failure-to-file and failure-to-pay penalties.

Delinquent filing will ensure proper tax liability, but not necessarily the absence of delinquent tax penalties.

When circumstances are appropriate, taxpayers can consider penalty abatement or other types of penalty relief.

For a penalty, there may or may not be relief available based on the facts, nature of the penalty, the taxpayer’s pattern of non-compliance, and IRS guidelines.

Typically happened when taxpayers have several years of returns they have not filed.

Do not guess; begin by reconstructing the records.

These can be sources:

• IRS wage and income transcripts
• Previous tax returns
• Forms W-2 and 1099
• Brokerage statements
• Mortgage records
• Bank records
• Business accounting records
• Receipts and expense records
• Prior-year depreciation schedules
• Health insurance records
• Retirement-account information

IRS transcripts will provide evidence of income reported to the government, but they might not include all the documents that are required to support deductions.

The importance of reconstructing expenses may be particularly significant if you were running a business, since the difference between your gross income and your allowable business expenses can significantly impact your tax liability.

If a taxpayer has five returns that are not on file, he could have five very different tax situations.

A refund could be issued after 1 year.

The other one could leave you with a small balance.

A third may have a large amount of self-employment income.

The IRS may have a substitute assessment already made for another year.

An individual assessment for each year should therefore be made.

You should also find out if the IRS has already been assessing tax for any of the years in question. If a delinquent tax return is filed after an SFR assessment, there may be extra actions that must be completed to ensure that the IRS is able to accurately process the tax return.

Tips that Will Help Taxpayers

If you have several years of missing returns, then consider the following practical steps:

1. Do not ignore notices from the IRS. Never disregard IRS letters

Please read each notice thoroughly and determine which tax years the notice applies to. Non-filer notices (like CP59, CP515, and CP516) may mean that the IRS has no record of returns that were required.

2. Find out what the IRS already knows

Get IRS transcripts if available, prior to filing returns. This can be useful for discovering any shortfalls in income or missing items that shouldn’t be missed.

3. Reconstruct your records

Avoid solely using IRS transcripts. Obtain bank statements, receipts, business records, investment papers, and other records and documents to support deductions and credits.

4. Be wary of any SFR.

If the IRS’ substitute return, compare it with your financial situation. The liability that you will report may be significantly different.

5. File correctly, not quickly

If income or deductions are reported incorrectly, it could cause another problem if the delinquent return is rushed. When several years are being filed at the same time, accuracy is of particular importance.

6. Keep it clean and tidy

Identify the return required, and set up appropriate liabilities. Then assess what is feasible to resolve those liabilities.

7. Review OIC eligibility upon filing

Determine first if the Offer in Compromise is being considered; if it is, be sure that all required returns and compliance obligations have been met.

For complicated cases, 8. think about seeking the help of professionals.

A combination of unfiled returns with business income, with IRS assessments, liens, levies, or large debts can get complicated. A tax expert can assist in a tax history reconstruction and determine tax resolution possibilities.

Yes.

If you don’t file, you are not out of tax liability with the IRS. Indeed, if a taxpayer continues not to file, further enforcement action could ensue.

If the case remains unresolved, it can be referred to the IRS collection case, which could include tax liens or tax levies. Failure to file can also result in further sanctions and, under certain conditions, criminal action.

That’s why proactive compliance is important.

Once the missing returns have been filed and processed, you can evaluate the complete tax picture.

From then on, questions get more specific:

• What is the total amount of what they owe, per tax year?
• Can penalties be “received”?
• Is the taxpayer able to pay in full?
• Would an installment agreement be within their means?
• Is hardship collection relief available?
• But can an Offer in Compromise be realistic?
• Is there any lien or levy that has been placed which should be addressed?

If the IRS chooses to use an OIC based on doubt as to collectibility or effective tax administration, you will provide the IRS with financial information on a Form 433-A (OIC) or Form 433-B (OIC) depending on your financial situation.

It can be intimidating to have five years or more of unfilled tax returns, but that’s only because you’re likely to make the issue more difficult if you do nothing.

First, the tax compliance issue should be addressed: locate any missing returns, fill in the missing records, and ensure that the correct tax returns have been filed, as well as checking whether the IRS has prepared substitute returns or assessed tax.

After the filing requirements are covered, taxpayers may consider making payment arrangements, seeking penalty abatement, requesting a Currently Not Collectible designation, an Offer in Compromise, or other collection options.

Most importantly, don’t assume that an IRS-prepared return is the amount you owe. Deductions, exemptions, and credits that might impact your actual liability may not be reflected in a substitute return. An accurate return will provide the IRS with a clearer picture of your tax situation.

The answer to the central question is especially crucial in the case of an OIC; typically, all required returns must be filed prior to the IRS considering the offer.

The earlier a taxpayer recognizes the missing years and formulates a plan to address the missing years’ tax liability, the sooner the uncertainty of being in IRS debt can be replaced with a structured compliance and resolution plan.

1. Can I resolve IRS tax debts if I have unfiled returns?

Yes, you typically have to deal with your past tax returns first.

After you have resolved the returns that are due, you can then look into installment agreements, Currently Not Collectible, penalties, or even an Offer in Compromise, depending on your situation.

2. What will happen if the IRS files a substitute for me?

The IRS will sometimes use a Substitute for Return based on information they have on file. The IRS will rarely include any deductions or tax credits that you may be entitled to. By filing your own tax return, you can offset what the IRS may have assessed you for.

3. Should I file missing returns before applying for an OIC?

Yes. The IRS requires that all tax returns are filed before considering an Offer in Compromise. Filing past-due tax returns can help establish what you actually owe, which in turn can help establish if an Offer in Compromise is truly an option for resolving your tax debt.