If your tax returns are delinquent or not filed, the dangers are probably more serious than you think. Two things concern us about unfiled tax returns.
The first is that the statute of limitations for collection (the IRS collecting from you via wage garnishment, levies against bank accounts, etc) never starts for unfiled returns. Typically, the IRS only has ten years to collect on a tax assessment deriving from a tax return you filed (assuming no tolling). However, that ten-year “clock” never starts if you fail to file a tax return signed under penalties of perjury (there’s a narrow exception for “agreed upon” assessments but that’s beyond the scope here).
Second, the IRS will most likely file a Substitute-Filed-Return, or “SFR”, on your behalf if you fail to file a tax return yourself. The SFR is filed in the best interests of the government, not accounting for additional exemptions for children that you may claim, a spouse, or even business or medical expenses or other credits that you may be entitled to. Normally, the SFR reports “phantom” tax and penalty and interest due beyond what you are legally liable to pay.
You must remember that there are always two (2) sources reporting to the IRS. One of those sources is suppose to be you, by self-reporting. The other source is some person or entity that paid you, by filing a 1099, W2, or some other tax information document with the IRS. The IRS matches that third-party reporting to see if you owe them a tax return (and money!). If you do and fail to self-report, the IRS may then file an SFR and begin collection procedures against you.
Two additional concerns with unfiled tax returns: one, if you fail to file a tax return within three years of the original due date of the return, or two years from the time you paid your tax, you may lose any refunds due you; and two, “yes” some taxes (if “old and cold”) are dischargeable in bankruptcy. However, if you fail to file a tax return yourself and walk into the bankruptcy court with SFRs against you, the IRS will take the position that the SFRs are NON-dischargeable because they do not constitute “tax returns” under the bankruptcy and tax code (and win that argument).
By failing to file past-due tax returns, you may lose refunds, you may extend a ten (10) year statute of collections indefinitely, you may be liable for more money than you truly owe, and you may lose the ability to discharge old tax debt in bankruptcy. All of these potential outcomes are bad options.
Of course, you may counter all of this by actually filing your past-due tax returns, no matter how late. Even if an SFR has been assessed against you, you can still file your own true and accurate tax return and offset that SFR. Also, if you are missing wage and income information from several years ago (or up to ten years), you can prepare a tax return using IRS Wage and Income Transcripts. A Wage and Income Transcript is the third-party reporting that we discussed earlier and includes data from W-2s, 1099s, 1098s, or 5498s (going back ten years). At Morton Law PLLC we routinely use Wage and Income Transcripts to prepare past-due tax returns for clients.
See link on sidebar, “Unfiled Tax Returns”, and NY Times article from 2012, available at: NY Times Article
Next time, we will discuss how an SFR, if you wait long enough, may (or may not) become “set in stone” and due and collectible (with few options to adjust the amount due).