The Big Picture
The IRS estimates that approximately ten million people fail to file their income tax returns on time each year. On October 12, 2023, the IRS announced that the “tax gap’ between what the taxpayers owe, and what they voluntarily pay the federal government has reached $688 billion a year. With the help of the Inflation Reduction Act, the IRS is adding focus to close the tax gap by enforcing compliance on non-filers. If you are one of the millions of Americans who have not filed their tax returns for the last few years, or as much as 10 years, it can feel really overwhelming.
How Many Years Do I Have To File?
A common question for people with delinquent tax returns is how far they have to go back to file so they can become compliant once again. IRS Policy Statement 5-133 Delinquent Returns- Enforcement of. Filing Requirements provides a general rule that taxpayers must file six years of tax returns to be in good standing with the IRS. This is good news for those who haven’t filed as much as ten years of tax returns.
Typical Reasons Why Taxpayers Do Not File Returns.
Non-filing can happen for a number of reasons. For instance, a lot of taxpayers don’t file because they are too worried about owing a big tax debt. This can happen to self-employed people who are classified as sub-contractors and are mainly receiving Form 1099s yearly from third parties. Others fall behind due to a personal, health, or financial crisis in their lives like an illness, death in the family, divorce, or loss of income. Once a taxpayer starts not filing for a single year, it can just become a habit of not filing over the coming years. It can get overwhelming since in the taxpayer’s mind, additional tax debts are incurred every year. Another challenge that is probably blocking people in their efforts to file their late returns is the difficulty in organizing financial and tax records. If many years have passed, it can be hard to obtain records from the bank, and people may have lost their tax documents already. Feeling overwhelmed and stressed can often lead to procrastination.
What Happens If A Taxpayer Doesn’t File Returns.
If a taxpayer has not filed tax return/s, the IRS can start the process by filing a substitute for return (SFR) about three years after the due date of the return. When an SFR is filed, the IRS prepares the tax returns for the taxpayer based on the information that they have in their system. This is usually a disadvantage to the taxpayer since there will be no deductions or write offs claimed when the IRS prepares these SFRs. It is important to note that the IRS does not have all the information of the taxpayer like filing status, dependents claimed, business write offs (if self-employed), and other deductions/ credits that a taxpayer may be entitled to. Years with tax balances will result in hefty penalties and additional interest. If balances remain unpaid and the taxpayer is unresponsive of the collection letters and notices being sent, the IRS has the power to levy or garnish the taxpayer’s bank account, or wages.
Being Proactive Is the Best Solution.
The only way to avoid having to deal with these issues is for a taxpayer to file the actual and accurate tax returns before the IRS catches up. If you are one of the millions of Americans who have unfiled tax returns, it may not be as difficult as you think it is to get back on track. Contact us at Prime Tax Solutions at (714)783-9782, or email us at info@primetaxsolutions.us and schedule your free consultation with us. You do not have to do it all alone. At Prime Tax Solutions, we have a system to be able to access your older and current tax records. For self-employed people, we can help you reconstruct your income and expenses so you can claim the necessary write offs in operating your business. Once you become fully compliant with your tax filing requirements, we can help you decide the best option for you in paying your total tax balance. Depending on your current financial situation, the IRS has several options for taxpayers who are experiencing hardship. Contact us at Prime Tax Solutions at (714)783-9782, or email at info@primetaxsolutions.us and we can help you go through those options. Do not wait for the IRS to subject you to any collection action.
Summary
