One of the most common types of matters I handle is the nonfiler—the individual or business that has not filed taxes in one or more years. One in every ten people who has a filing requirement does not file a return. Some common reasons people don’t file:
- An illness or family death around tax season
- Decline in business and inability to afford bookkeeping
- Fear of not being able to pay the IRS the tax due
- Overwhelmed with other demands of business
- Analysis paralysis – they are simply overwhelmed at the prospect of getting everything together to file
What Can Happen to Nonfilers?
Filing and paying taxes are good things, although many like to disagree.
Filing and paying means you’re making money and have a viable
business or other income stream. There are three major reasons why you
should file your tax returns:
- It’s a crime not to file
- In addition to the tax, you’ll owe additional penalties
- The IRS will file returns for you, often causing you to owe more than if you filed yourself
Don’t Go to Jail for Being a Nonfiler
Prosecuting nonfilers is a slam dunk case for the Government. They
essentially just need to prove you didn’t file and you knew you had to.
The Government doesn’t have the time or resources to prosecute every
nonfiler case. But to eliminate the risk—and who doesn’t want a reduced
their risk of committing a federal crime—you just need to file.
Nevertheless, the IRS can’t prosecute you forever. They can only charge you
criminally within six years of the date the return was due. Returns due 10
or 15 years ago are beyond the criminal statute of limitations. You don’t
have to lose sleep thinking you’ll be charged for not filing these returns.
Avoid Penalties and Interest
There are financial incentives for filing your taxes as well. The IRS penalizes nonfilers to deter them from continuing not to file. There are
three penalties for nonfilers:
- Failure to file
- Fraudulent failure to file
- Failure to pay
The rarest of the three, the fraudulent failure to file penalty, is a 15%
penalty per month, up to 75% of the tax due. Without even considering
interest, you are doubling your IRS bill.
The general failure to file penalty is 5% per month of the tax due, up to
25%. The penalty starts as soon as the return is late. If you did not file
an extension, the due date is April 15 for individual taxpayers. You can
file an extension and have until October 15 to file the return. But the
extension must still be filed (and the tax paid) by April 15.
Besides the failure to file penalty, the IRS will also hit you with a failure
to pay penalty. The failure to pay penalty is 0.5% per month, up to 25%.
The IRS Will Eventually File for You Anyway
The IRS has the authority and ability to file for you if you do not file
your tax returns. 2 The IRS calls it a substitute for return or SFR. It’s
created by taking information they have in your file, such as W2s and
If you don’t respond to notices alerting you to the fact that the IRS is
preparing an SFR, the liability can become final, and the IRS can then collect on whatever number they determine you owe. Even if the
number is not right, the IRS can still collect on the liability.
There are many downsides to an SFR filing. You will not be able to file
bankruptcy on taxes due from an SFR. In addition, if you are married,
you will receive none of the potential benefits of filing Married Filing
Jointly under the SFR program. The SFR does not consider many
credits, exemptions, and deductions. The tax owed from an SFR is
usually substantially more than if you voluntarily filed a tax return.
Even if the IRS uses an SFR to determine your tax liability, you can
usually undo this through the IRS’s audit reconsideration process.
But How Will They Know
Perhaps the less risk-averse nonfiler will still not file, even when facing criminal prosecution and substantial penalties. “How would they even know?” they might ask.
There are a few different ways the IRS finds nonfilers. First, remember the W2 or 1099 you receive at the end of the year showing your income? You’re not the only one who gets a copy. The IRS receives a copy as well. Using its computer system, the IRS can easily spot nonfilers and start sending notices.
Second, nonfilers can be turned in by whistleblowers. Maybe you aggravated an employee or significant other. Maybe you have a loose tongue and bragged about “getting away with it for years.” In any case, people can turn you into the IRS, even if you would have escaped scrutiny otherwise.
Filing Late Returns
Filing returns that are years late can be an intimidating prospect. Records are lost, misplaced, or need to be dug out of a storage closet. Often nonfilers don’t even know where to being. Here are some helpful steps nonfilers can take to get in compliance:
Step 1 for Nonfilers: Reach out to the IRS
It’s said about a lot of things, and it’s true here: The first step is the hardest. It is an intimidating endeavor to call the IRS—the same IRS you’ve been hiding from for years—and discuss your situation. But it’s a necessary step to ensure you and the IRS are on the same page regarding what needs to be done.
Maybe you sent in a tax return in 2015, but the IRS never got it. Or maybe you’re at risk of collection activity because of an old balance or because the IRS filed a return through the SFR program. Often, the IRS will only require the last six years of tax returns, even if you’re nonfiling goes back even longer. But for you and the IRS to be on the same page, they need to be contacted.
Should I Really Call the IRS?
Truth be told, I can’t say whether it’s a good idea for you to call the IRS, but someone needs to call. If you’re concerned about it being a criminal case or worried you might give incriminating evidence over the phone, you should have an authorized representative call on your behalf.
When you reach out to the IRS, they will have lots of questions for you, and you’ll have lots of questions for them.
Be polite. The person you’re speaking with is working in a high-volume call center. You’ll get further with them with kindness than with an aggressive, demanding style.
Be forthright. Tell them you’ve fallen behind in filing, but you are now trying to fix the situation. They will appreciate the honesty.
Be Prepared for Questions. What’s your current address? Are you working? Where? What’s a good phone number for you? Where do you bank? These are some of the questions the IRS may ask. Some of it is harmless, like your address or phone number. Other information could help the IRS with liens and levies immediately or down the road. Never lie. Besides being a crime, it’s a bad idea. Dance, if you can. Maybe you need to look through records to get the information or maybe you honestly don’t remember. Don’t guess. This is one of the major benefits of hired helped. It’s believable for an authorized representative not to know where you bank. But for you? Not so much.
Write it down. Write down the employee’s name and identification number. It won’t necessarily help if you’re given wrong information, but it will at least help prove a call has taken place. Ask them what years you need to file and if you owe any balances. Write down the years you need to file and the years you owe for. Ask them the address the returns need to be sent to. Sometimes, different years will need to be sent to different addresses. Other times, you’ll be given a fax number to send the returns to.
Trust, but verify. I’ve been given wrong information by IRS representatives more times than I can count. You cannot merely rely on what’s told to you over the phone. Request copies of your account transcripts and wage and income transcripts. Account transcripts will show what years you filed or didn’t file, what years the IRS filed for you, tax due, penalties, interest, and information to determine the statute of limitations. Your wage and income transcripts will show all the information reported to the IRS by third parties, such as W2s and 1099s. This is vital information you will need to prepare the tax returns.
The account transcripts and wage and income transcripts can be faxed or mailed to you. Try to have them faxed. This will speed up the process. You can also access these documents online at www.irs.gov.
More time. At the end of the call, sincerely thank them for their time, and ask them for a 60-day hold. The hold will prevent the IRS from taking collection action if you owe from other years. It will also put a hold on the IRS process for filing returns for you. These are informal holds—if the IRS employee doesn’t properly input it into the system, the IRS could still act. Generally, the IRS will give you at least 30 days to file the return but asking for 60 days doesn’t hurt.
What am I Requesting?
-Years you filed or didn’t file.
-Wage and Income Transcripts.
-Address to send the returns.
Step 2 for Nonfilers: Start Gathering Your Documents
While the wage and income transcripts will provide much-needed information to help complete your tax return, it’s not all-inclusive. If you did contract work for someone but were never issued a 1099, the IRS won’t know about it. Just because the IRS doesn’t know about it, doesn’t mean you get to not report it.
Other items like dependent children, deductions for your schedule C business, basis on the sale of capital assets and many other items that can reduce the tax owed are not on the IRS transcripts.
Contact your bank and request bank statements for the years you are filing. You may want to request canceled checks as well if you think there’s lots of deductions in there. Obtain your credit card statements. If you’re self-employed, don’t be afraid to reach out to vendors and request copies of invoices.
Don’t worry about gathering every receipt and invoice. After all, the IRS gave you a deadline to file the returns. Step 2 is to get the ball rolling and build on the momentum of Step 1.
Step 3 for Nonfilers: Prepare the Returns
Nonfilers have two choices to get the returns done. You can prepare them yourself or have someone prepare them for you. I highly recommend the second option.
Technology has come a long way and it’s easier than ever to file your returns online. But I’ve handled enough audits to know many people do an incredibly poor job preparing their own return.
If your return is extremely simple—you’re a W2 wage earner and are taking the standard deduction—you can probably get away with filing yourself. If you qualify, you may even be able to file your returns for free.
But everyone else should really be using a CPA or Enrolled Agent to prepare the returns.
What if I run out of time?
You’ve called the IRS, started gathering your documents, and contacted a CPA or Enrolled Agent for help. But you’re still waiting on cancelled checks from the bank and sorting through old receipts. What do you do when your hold date expires? Call the IRS back and explain the situation. Tell them you’ve hired help, but it’s taking longer than expected. Ask for an additional 30 days. They can say no, but they rarely do. They appreciate you’re working hard to resolve the issues.
Step 4 for Nonfilers: Mail or fax the returns
In Step 1 for nonfilers, you obtained the address to send in the missing returns. You may have also been given a fax number to send them in. If you fax them, keep the fax confirmations. If you mail them, mail them certified mail. You’ll want proof they were sent and on what date. It’s not unheard of for the IRS to misplace tax returns.
Step 5 for Nonfilers: Call them Back
After you’ve faxed the returns in or sent them certified mail, call the IRS back. Let them know the date they were sent. At this point, the IRS will likely put an extended hold on the account—usually 90 days to allow time for processing.
Warning: Never Let a Hold Expire
Let’s say you call the IRS and they give 90 days for the returns to process. Calendar the expiration date and make sure you call on that date and ask for more time. Failure to do so could result in collection action or other action taken by the IRS.
Step 6 for Nonfilers: When the returns have processed
Once the returns are processed, you’ll likely have a balance due. There are a few different options to resolve the balance, such as currently non-collectible status, installment agreements, and an offer in compromise. But don’t wait to act—you want to make sure take action before the IRS starts levying your account or filing liens.
Nonfilers: Do it Yourself or Hire Help
Potential clients will often ask if they need to hire someone to help with the process. Of course, there are costs involved and nonfilers will wonder if it’s worth the investment. Every person is different, but here’s my suggestion:
Nonfilers: Do it Yourself or Hire Help
Do it Yourself if:
Hire Help if:
|You think you’ll owe a small amount
|You’re worried about going to jail
You don’t think you’re at risk of criminal prosecution
|You know you’ll have a large balance due
You will commit and follow through with the process
|You are too busy to handle it yourself
|You don’t mind waiting on hold for hours at a time with the IRS
|You’re worried you’ll disclose harmful or incriminating information when talking to the IRS
|You want someone with experience with the process
How Paladini Law Can Help Nonfilers
Confronting the IRS when you haven’t filed in years can be an intimidating and stressful process. You may be tempted to continue to bury your head in the sand until something horrible happens and you can’t avoid them any longer. Hiring a tax attorney gets you someone with the experience of talking with the IRS and holds you accountable to follow through with the process.
Attorney Brad Paladini has helped taxpayers across the State of New Jersey reduce or eliminate tax penalties. Brad has fought tirelessly to protect taxpayer’s homes, businesses, and more. Call 201-381-4472 or fill out a contact form to schedule a consultation with Brad.