What If I Haven’t Filed Taxes in 5 Years?

Not filing taxes can feel overwhelming, and many individuals find themselves in this situation for various reasons. The Internal Revenue Service (IRS) offers clear pathways to help taxpayers become compliant. Addressing unfiled tax returns is an important step towards resolving potential issues and regaining financial peace of mind. Understanding the available options and proper procedures is the first step in moving forward.

Implications of Not Filing

Failure to file required tax returns can lead to a range of actions by the Internal Revenue Service. One immediate consequence is the failure-to-file penalty, which is 5% of the unpaid tax for each month or part of a month a return is late, capped at 25% of your unpaid tax. This penalty can apply even if you are due a refund. The failure-to-pay penalty is 0.5% of the unpaid taxes per month, also capped at 25%.

Interest accrues on underpayments of tax, including both the unpaid tax and any penalties. This interest is compounded daily from the original due date. The interest rate is set quarterly, generally the federal short-term rate plus a few percentage points.

If an individual does not file, the IRS may prepare a Substitute for Return (SFR) using information from third parties like employers (W-2s) and financial institutions (1099s). An SFR results in a higher tax liability because it does not include deductions, exemptions, or credits the taxpayer might have claimed. This can lead to an inflated tax bill compared to a taxpayer-filed return.

Ignoring an SFR can lead to aggressive collection actions. The IRS can place a federal tax lien on a taxpayer’s property if taxes are not paid after demand. A lien secures the government’s interest in the taxpayer’s assets. The IRS can also issue a levy, seizing property, wages, or bank accounts to satisfy the unpaid tax debt. This action occurs after a written notice of intent to levy is provided.

While rare for simple failure to file, willful tax evasion can lead to criminal charges, including fines and imprisonment. Criminal investigations are reserved for cases involving intentional wrongdoing, such as deliberately hiding income or filing fraudulent returns. The distinction hinges on evidence of deliberate action to evade tax obligations.

Steps to Gather Information

Before preparing and filing delinquent tax returns, gathering all necessary information and documents is a first step. While the IRS can go back indefinitely for unfiled returns, the agency requests the past six years of returns to bring a taxpayer into compliance. If a tax refund is due, taxpayers have three years from the original filing deadline to claim it; after this period, the refund is forfeited.

To reconstruct your financial history, obtaining IRS records is helpful. The IRS offers several types of transcripts. A Wage and Income Transcript displays data from information returns like Forms W-2, 1099, 1098, and 5498. A Tax Account Transcript provides data such as filing status, taxable income, payment types, and any changes made after an original return was filed. A Record of Account Transcript combines information from both the tax return and tax account transcripts.

These transcripts can be requested through several methods. The quickest way is online, via the IRS’s “Get Transcript Online” tool, which allows immediate viewing, printing, or downloading after identity verification. Alternatively, transcripts can be requested by mail using Form 4506-T, Request for Transcript of Tax Return, which takes 5 to 10 calendar days for delivery. A request can also be made by calling the IRS automated phone transcript service.

Beyond IRS records, collect your own financial documents for each unfiled year. This includes bank statements, pay stubs, and investment statements. For those with business income or expenses, detailed records are needed. Receipts for potential deductions and credits, such as medical expenses, charitable contributions, mortgage interest, or student loan interest, should be compiled. Gathering these documents helps ensure accurate return preparation and maximizes eligible deductions or credits, potentially reducing tax liability.

Process for Filing Delinquent Returns

Once all necessary financial information has been gathered, the next step involves preparing and submitting delinquent tax returns. Each unfiled year requires a separate tax return, using the forms applicable to that tax year. While some tax software may support preparing returns for a few prior years, older tax years necessitate obtaining historical forms directly from the IRS website or through professional tax preparation services. Seeking assistance from a qualified tax preparer is advisable due to the complexities of delinquent filings.

Electronic filing is not an option for prior-year returns beyond a certain period, usually the two most recent tax years. Most delinquent returns must be prepared, printed, and submitted by mail. Send each year’s return in a separate envelope to the appropriate IRS service center, found in the instructions for the specific tax form or on the IRS website. Include all required schedules and supporting documents with each return for proper processing.

When mailing delinquent returns, use certified mail with return receipt requested. This provides verifiable proof of timely mailing and delivery, which can be helpful in case of future disputes with the IRS regarding the submission date. The IRS considers a document filed on the date it is postmarked when sent via certified mail, offering protection against potential penalties for late filing if there are postal delays.

After submitting the returns, taxpayers should anticipate longer processing times compared to current-year e-filed returns. Paper-filed delinquent returns can take several weeks or even months for the IRS to process. During this period, taxpayers may receive various notices from the IRS, such as CP notices regarding assessed penalties or interest, or balance due notices if taxes are owed. Review these notices and respond promptly if any discrepancies are identified.

Options for Unpaid Taxes

After filing delinquent tax returns, taxes may be owed, and immediate payment in full may not be feasible. The Internal Revenue Service (IRS) offers various payment options to help taxpayers resolve their tax liabilities. Paying the tax debt in full is the simplest and most cost-effective solution if possible, as it stops the accrual of further penalties and interest.

For those who need a short period to pay, a short-term payment plan allows up to 180 additional days to pay the balance in full. This can be requested online through the IRS website. While interest and penalties continue to accrue, the arrangement provides a temporary reprieve without a setup fee.

If a longer payment period is needed, an installment agreement (IA) allows taxpayers to make monthly payments for up to 72 months. To apply, individuals can use the IRS Online Payment Agreement tool if they owe $50,000 or less in combined tax, penalties, and interest, and have filed all required returns. Alternatively, Form 9465, Installment Agreement Request, can be submitted by mail. Although penalties and interest continue to apply, the failure-to-pay penalty rate may be reduced once an installment agreement is in effect.

For taxpayers facing financial hardship, an Offer in Compromise (OIC) may be considered. An OIC allows taxpayers to settle their tax debt for a lower amount than what they originally owe. Eligibility is based on the taxpayer’s ability to pay, income, expenses, and asset equity. The IRS approves an OIC when the amount offered represents the maximum it can expect to collect within a reasonable timeframe. This complex process benefits from professional assistance, and applicants must be current with all filing requirements.

Another option for those experiencing financial distress is Currently Not Collectible (CNC) status. If the IRS determines that a taxpayer cannot pay their tax debt without incurring undue financial hardship, it may temporarily suspend collection efforts. While in CNC status, the debt does not disappear, and interest and penalties continue to accrue, but active collection actions are paused. The IRS periodically reviews the taxpayer’s financial situation to determine if their ability to pay has improved.

Taxpayers may also explore penalty abatement options. The First-Time Abatement (FTA) program can provide relief from failure-to-file, failure-to-pay, and failure-to-deposit penalties if the taxpayer has a clean compliance history for the preceding three tax years. If FTA is not applicable, penalty abatement based on reasonable cause may be requested. Reasonable cause applies when the taxpayer can demonstrate that circumstances beyond their control prevented them from meeting their tax obligations. Requests for penalty abatement can be made by calling the IRS, writing a letter, or by submitting Form 843, Claim for Refund and Request for Abatement.