Unfiled Income Tax Returns written on chalk board

If you are reading this you may not be current with your tax return filing obligations.  As a tax attorney, I can say that individual taxpayers failing to file tax return(s) is widespread.  The IRS typically identifies more than 7 million non-filers* each year.  I have meet all sorts of taxpayers that for one reason or another have unfiled tax return(s). This guide will help the non-filer get back into compliance.

*Source Treasury Inspector General For Tax Administration Report

What happens if you do not file an income tax return?

It depends. Are you required to file? Individuals with little or no gross income during a tax year may not be required to file a return. The Form 1040 Instructions will include a section called “Who must file” or “Do you have to file?” and will instruct the reader to use: Chart A, B, or C to see who must file a return.  Best Practice: I recommend filing a timely tax return, even if not required.

Below is "Chart A" from the 2018 Form 1040 Instructions. 

filing requirements for filing form 1040 tax year 2018

What are the consequences not filing a required return? 

Scenario I - Due a Refund (with return) 

If you had sufficient tax withheld and would get a refund you won't be penalized for not filing a tax return but may forfeit any refund. On the other hand, there are consequences to taxpayers who owe income tax and do not file an income tax return.

Scenario II - Owe Taxes (with return)

If you owe tax and choose not to file by the filing deadline you will be subject to penalties + interest. The IRS calculates interest on the net tax due as of the filing deadline which accrues until the tax is paid (interest compounds daily).

Penalties 

Failure to File Penalty - IRC Section 6651(a)(1)

The failure to file penalty is imposed on returns not filed by the filing deadline.  The penalty is 5% of the net tax due per month that return has not been filed. The failure to file penalty cannot exceed 25%.

Failure to Pay Penalty - IRC Section 6651(a)(2)  

The failure to pay penalty is imposed on the tax return balance due and unpaid by the filing deadline.  The penalty is .5% or half of 1% for every month or part of month that  tax remains unpaid.  The failure to pay penalty cannot exceed 25%.

Combined Penalties 

When both penalties apply to the same balance, the failure to file penalty is reduced by the failure to pay penalty. Thus the combined penalty will not exceed 5% per month. Accordingly, the maximum combined penalty is 47.5% (22.5% late filing + 25% late payment).

What is a "Substitute for Return" (SFR)

When an individual does not file a tax return the IRS may prepare a return for that taxpayer which is categorized as a Substitute for Return (SFR).  The IRS is able to prepare a substitute for return based on information reported by 3rd parties (i.e. W2s and 1099s). You do not want the IRS preparing your tax return for you! The IRS will only generate a Substitute for Return if doing so will create a bill.  Additionally, the balance due with the SFR may be overstated since the IRS won't take advantage of the credits and deductions available.

Understanding Statute of Limitations + Unfiled Tax Returns

There is no statute of limitations preventing the IRS from examining a year when a tax return was never filed.  There is a statute of limitation preventing taxpayers from receiving a tax return refund. A taxpayer that would be due a refund must file a tax return to claim refund within 3 years of the filing deadline or alternatively two years from the date the tax was paid.  It is for this reason that priority should be focused on tax returns with refund potential within 3 years of the filing deadline.

How to prepare prior year tax returns written on chalk board

How to Prepare Prior Year Tax Returns?

In many cases the taxpayer will no longer have the tax documents needed to prepare a prior year return. In situation like this it is essential to request this information from the IRS.  Taxpayers may request a Wage and Income Transcript from the Internal Revenue Service this transcript will provide much of the needed information necessary to prepare a tax return including data from W-2s and 1099s. The Wage and Income transcript is available for the prior 10 years.

Pro Tip: I do not recommend preparing prior year tax returns without a wage and income transcript. Even if you have the tax documents to prepare your tax return(s), requesting a wage and income transcript will guarantee that nothing is missed or not reported on tax return (preventing the chance of receiving a tax notice).

How Many Years of unfiled tax returns should be Filed?

The IRS generally will not enforce tax return compliance for periods in excess of six years.  As a result, non-filers that want to be "current" with the Internal Revenue Service will file the most recent six years of income tax returns.

Note: The IRS may enforce tax return compliance in excess of six years based on facts and circumstances.

How to File Past Due Returns with IRS (E-File & Paper-File) 

Once completed the past due returns will need to be filed with the IRS. The most recent three years of returns may usually be electronically submitted or e-filed with the IRS; and the older returns paper-filed and mailed to the IRS.

Pro Tip: When mailing multiple years of tax returns it is recommended to mail each return in a separate envelope.

New York State Considerations

If you are filing an income tax return with the IRS be aware that you may also be required to file a state tax return.  New York State has a Voluntary Disclosure Program ("VDP") that allows eligible non-filers to come forward and file back taxes.  Taxpayers going through the VDP will not be subject to penalties or charged criminally (a nice incentive for non-filers).  Learn more about the New York State Voluntary Disclosure Program.

Unfiled Tax Return Help    

Alizio Law is unique being a law firm that offers in-house tax preparation services a benefit for clients in non-filer situations. Peter E. Alizio is a dual practitioner working as a CPA in tax compliance and a tax attorney focusing on tax controversy resolution. Peter has over 10 years of experience preparing income tax returns and can prepare your past due tax return(s). If you need assistance, you can email Peter or call him at (212) 520-2906.

Peter Alizio Quote - my ideal case is helping a nervous client with years of unfiled tax returns