What Does the IRS Know About Your Old Unfiled Taxes? - Find Out What Information They Have

If you haven’t filed your taxes in years, you aren’t alone. More importantly, you aren’t out of options. Thousands of taxpayers fall behind each year, for reasons ranging from life upheavals that put them in survival mode to confusion over tax filing requirements to simply forgetting to file.

If you don’t file and the IRS doesn’t send a bill right away, it might seem like you’ve gotten away with it—but the fact is that the IRS likely already knows that you should be filing, and it’s just a matter of time until the consequences catch up with you.

Even if you don’t send the IRS your information via a tax return, they already have much of your financial information, and they can use it to bill you for what they think you owe. Keep reading to find out how the IRS tracks unfiled returns, what happens if you wait to address the problem, and how to start fixing your unfiled returns problem.

Key Takeaways

The IRS receives income data from third parties and likely already knows that you should have filed.
Unfiled returns and unpaid taxes can result in serious consequences, including liens, levies, and wage garnishment.
Filing late still gives you control over your tax resolution and financial future.
Working with a tax professional gives you the chance to explore tax resolution options.

Filing Doesn’t Notify the IRS—They Already Know

Falling years behind on tax returns is a more common problem than you know. People think that not filing their return keeps them under the IRS’s radar. While many people fall behind by accident, others intentionally choose not to file because they know they cannot pay in full. They hope that holding off on filing will give them extra time to save up to pay their tax debt.

However, there’s really no way to fly under the IRS’s radar. Even if you haven’t filed your tax returns in years, they likely already know how much money you earn and approximately how much you owe in taxes. They receive extensive data from third-party sources that is attached to your Social Security number, including:

W-2s from employers
1099s from clients, gig jobs, and financial institutions
Mortgage interest statements
Health insurance coverage forms
Student loan interest forms
Bank and brokerage account income forms

This data is automatically assigned to a filed return. But when that information isn’t linked to a return, the IRS gathers data on its own. You may not receive notices right away. The IRS has limited resources when it comes to following up on unfiled returns and unpaid taxes, but they do know, and eventually, they will start attempting to collect.

What the IRS Knows and How They Use That Information

The IRS receives information via tax documents filed by employers, clients, banks, loan processors, and others that do financial business with you. This information is held by the Information Returns Processing database.

When the information they receive isn’t linked to a filed return, the IRS flags your Social Security Number for review. They match your third-party tax forms to past filed tax returns, estimate what they believe you owe, file notices, and eventually file a Substitute for Return.

Even if you held multiple jobs or did gig work for multiple companies throughout the year, the IRS puts it all together via W-2s and 1099s.

Common Notices of Non-Filing

The IRS will give you a chance to resolve your unfiled returns before they take further action. They send IRS notice letters that remind you to file your tax returns and inform you of the potential consequences of failing to file. Notices you may receive include:

CP59
CP259
CP515
CP516
CP518
CP518B
CP2566
CP3219N

These notices escalate gradually, reminding you of your obligation to file and telling you what their next step is if you do not respond.

What is a Substitute for Return?

If you ignore every notice the IRS sends you about your unfiled tax return, they will ultimately file a Substitute for Return on your behalf. This is essentially them filing your taxes for you so they can begin pursuing the unpaid tax debt.

A Substitute for Return is basically the worst-case tax scenario. It accounts for all of the income information provided to the IRS, but it does not include any deductions, exemptions, or credits that you’re owed. Because of this, the tax bill you receive is often significantly higher than what you would owe if you filed your own tax return.

You do not have to proceed with what the Substitute for Return says. You can file your own tax return, including credits, deductions, and exemptions, and move forward from there.

Dangers of Waiting to File

There are numerous consequences you may face if you put off catching up on your unfiled tax returns. Learn more about what’s at stake.

Statute of Limitations Doesn’t Start

The IRS has a limited timeframe in which they can collect tax debt—typically 10 years from the date that the tax is assessed. But if you don’t file, the tax is not assessed, and the ten-year window doesn’t start. This means that until you either file a return or the IRS files a Substitute for Return, the clock doesn’t start ticking on your tax debt. You could be on the hook for unpaid taxes for much longer than expected, simply because you did not file.

There’s also no statute of limitations on unfiled returns. That means the IRS can go back to any year that you didn’t file, review the situation, and try to assess tax against you.

Missing Out on Refunds

Some non-filers don’t realize that they are owed tax refunds for their missing returns. But while the IRS has 10 years to collect unpaid taxes, they only have to pay out missed refunds for three years from the original filing deadline. Once that date passes, the chance to collect is gone.

Penalties and Interest

IRS tax penalties and interest add up very quickly when you owe the IRS money. Their interest compounds daily, so it doesn’t take long for your tax debt to snowball. The same is true for penalties. Late-filing and non-paying penalties each max out at 25% of the initial tax debt, but when you combine them, that’s a full 50% increase on your tax bill—and of course, you pay interest on that as well.

Liens, Levies, and Wage Garnishment

After the IRS files a Substitute for Return, they can begin attempting to collect what you owe. If you ignore their notices regarding payment, they may escalate by placing a lien on your assets, levying your assets, and garnishing your wages.

Payment and Relief Options

Even if filing past-due returns does result in a tax bill, you have options. The IRS does want to collect what they are owed, but they would rather do so in a way that doesn’t cause you financial hardship. If you are unable to pay in full right away, you may want to look into these options:

Installment agreement: With an installment agreement, you can stretch out payments over several years. If you qualify for a Simple Payment Plan, you can extend payments until the Collection Statute Expiration Date (potentially up to 10 years).
Offer in compromise: This is a suitable option for those who have limited income and assets. What you ultimately pay on your tax debt is based on your ability to pay. The IRS does require extensive financial information if you apply for an offer in compromise, and they calculate your minimum payment based on your disposable income and the value of your assets.
Penalty abatement: While this option doesn’t pay off your tax debt or give you more time to pay, it may take off some or all of your penalties and significantly decrease your tax debt.
Currently not collectible status: This is a temporary relief option that stops collection actions until your financial situation improves. You must be able to prove financial need.

Your Next Step: Reaching Out to a Tax Professional

If you have unfiled tax returns from one, five, or 10 years ago, the most important thing you can remember is that you don’t have to navigate this alone. We understand that working with the IRS can be overwhelming, but with professional assistance, you can get your tax situation under control. We can:

Retrieve your IRS transcript to see what information the IRS already has about you
Prepare accurate back tax returns, consulting receipts, payslips, and bank statements as needed for accuracy
Advocate for penalty abatement
Negotiate with the IRS on your behalf to set up a payment arrangement that fits your needs.

You’ll be surprised how much better you feel once you just get started. Once the process of tackling your tax returns is underway, you’re on your way to tax compliance. Let’s get started now. Contact us today to set up your consultation.

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