Do you have unfiled tax returns? You’ve probably had to pay tax penalties and interest because of late filings, and you may be wondering what to do next to get back in good standing with the IRS.
But will filing those old tax returns trigger an IRS audit? This is a fear many taxpayers share. You may think that if you don’t do anything, you won’t be on the agency’s radar. You’d rather just go unnoticed. Unfortunately, that strategy won’t work, and the IRS will try to collect from you one way or another.
The real risk of late tax return filings is an increasing balance through penalties and interest, and eventually even legal trouble or asset seizure. Find out why filing now is always best, even when you fear an IRS audit. To get help addressing your unfiled returns now, contact us at Paladini Law today.
Key Takeaways:
- The IRS already has income information about you from various sources, so the agency will know if you don’t file your return.
- There is always a small chance any tax return will be audited, but the risk is low compared to the risk of not filing your return and getting hit with penalties and other enforcement actions.
- You want to avoid a substitute for return (SFR), which the IRS files on your behalf, because it doesn’t account for credits and deductions.
- When you file, the clock starts on important tax-related statutes of limitations.
- You can only claim your refund or request tax resolution options if you have filed your returns.
What the IRS Already Knows About Your Tax Situation
One big misconception many taxpayers have is that the IRS won’t know about them or their income unless they file a tax return. However, that’s not the case. The IRS already has income information about you from sources like:
- W-2s from your employer
- 1099-NECs from clients if you’re self-employed
- 1099-Ks from payment processors if you accept credit cards or use services like PayPal.
- 1099-Bs showing investment income from financial institutions
- 1099-INTs with interest payments from banks.
- Other third parties that have to report income provided to you
So, if you made money in a given tax year, and it’s taxable, the IRS probably already knows from these sources. If you haven’t filed past returns and haven’t heard anything from the IRS, that doesn’t mean they’ll never notice.
The IRS can be slow to act at times, but if you don’t file, they will eventually start enforcement actions. These may include sending you IRS notices, charging you with penalties and interest, and eventually filing a federal tax lien or issuing tax levies (asset seizure). So, failing to file your tax returns only increases your risk of trouble with the IRS. You can always work with an experienced tax attorney when you need help resolving your tax issue.
Is an IRS Audit Possible If I File Late?
Yes, the IRS may audit your return if you file late. However, filing your late tax returns doesn’t necessarily mean you’re going to be audited. You have a pretty low chance of ever being audited by the IRS, and filing late leads to about the same risk as any tax return filing. The much bigger red flag for the IRS is not filing at all.
Common reasons tax returns are flagged for audits include these triggers:
- Random selection through the IRS’s automated system
- Discrepancies in the income you reported versus information the IRS receives from third parties
- Underreporting your income
- Taking too many deductions
- Reporting big charitable donations with a relatively low income
Business returns may have different red flags that increase their audit risk, such as being in a high cash industry or reporting net losses multiple years in a row.
Of course, any time you file a tax return, you could be audited. But chances are low, and filing your past due returns gives you control over what’s reported for your income, expenses, and credits.
How the IRS’s Automated System Finds Non-Filers
The IRS relies on a complex automated system that watches for non-filers and discrepancies in reported information. Even if you miss a deadline and don’t hear from the IRS immediately, the system will eventually flag the problem, and you’ll be contacted. This automated system will trigger notices alerting you to the problem and demanding that you file. If you don’t file, the agency may issue a substitute for return.
Why You Want to Avoid a Substitute for Return (SFR)
One of the real risks of not filing your tax return is the IRS filing one on your behalf, which is called a substitute for return (SFR). An SFR only uses the information the IRS received from other parties about your income.
The biggest problem with an SFR is that it doesn’t include any of the deductions, credits, or exemptions that you qualify for. The IRS assesses taxes solely based on the reported income, so your tax bill will be higher — sometimes much higher — than what you would have to pay with a return you filed yourself.
Even if you file late, you can avoid the IRS using an SFR to assess taxes and begin enforcement. This is an important reason to file your past due returns sooner rather than later.
Penalties on Late-Filed Returns
If the IRS files an SFR on your behalf, they will also assess penalties and interest backdated to the original due date. The failure to file penalty is 5% of the tax due per month until you pay, not to exceed 25%. After 2024, the minimum penalty you’ll have to pay is $510. The IRS also charges interest on penalties, making your balance even higher. If you owe tax, the failure-to-pay penalty will stack on top of the failure-to-file penalty, potentially bringing your total penalty up to 50%.
Unfortunately, these penalties will also apply if you file your return late. However, you can qualify for first-time abatement for one tax period if you normally file your returns on time – that’s typically defined as filing on time for the previous three years.
In all cases, you can apply for reasonable cause penalty abatement. That applies in situations where events out of your control, such as death, illness, or natural disaster, prevented you from filing. If the IRS removes penalties, it will also remove the interest associated with the penalties.
Tax Return Statutes of Limitations to Know
The IRS has certain statutes of limitations on when both taxpayers and the agency can take specific actions. Here’s a look at important statutes of limitations that may apply regarding outstanding tax returns:
- IRS audits: The IRS has three years to audit a tax return, but if there is a significant issue, it can go back six years. The agency usually doesn’t go back more than that for audits.
- IRS collections: The IRS has 10 years from the date your tax was assessed to try to collect what you owe, including penalties and interest. This 10-year period is called the collection statute expiration date (CSED).
- Tax refunds: You have three years to claim your tax refund from the return due date. After that time, you won’t be able to get your refund.
Filing your tax return starts the clock on these statutes of limitations, so it’s important to file as soon as possible. Note that if you’re owed a refund, you can’t claim that unless you file the applicable tax return. If you owe money, you also can’t start the process of tax resolution until you file.
What to Do When You Have Outstanding Tax Returns
When you’re considering what to do when you have unfiled tax returns, the best thing you can do is to act quickly. Filing your returns won’t necessarily trigger an audit, and the risk for trouble is worse if you don’t file.
Here are steps to take to get the matter resolved before your balance gets even higher, the IRS files an SFR for you, or the IRS starts the collection process:
File Now
File your returns as soon as possible. Putting it off will only bring more attention to your account, and you’ll keep building up penalties and interest. If you continue to not pay and you owe a balance to the IRS, the agency will start collection actions based on the SFR assessment it makes, leaving you without the savings that come from deductions and credits.
Review Your Information Carefully
Avoid an IRS audit by ensuring all the information you include on your returns is accurate and up to date. Make sure you include all sources of taxable income, including any 1099s you receive from third parties that paid you and financial institutions. The IRS will receive this information from them, too, so never try to leave something off to get a lower tax bill.
Report Deductions and Credits Accurately
You have the power to report credits and deductions when you file your return yourself. Make sure you qualify for everything you include, carefully reviewing the eligibility requirements. Using a software program often helps you understand if you qualify, or you should talk to a tax expert when you’re not sure.
Explore Resolution Options If You Can’t Pay
If you can’t pay your tax bill in full, explore your options for resolution, such as an installment agreement, offer in compromise, or currently not collectible status. Remember that these options aren’t available to you until you file your overdue returns.
Don’t Ignore Your Tax Responsibilities
If you’re worried about being audited if you file, remember that there’s a much greater risk of IRS trouble if you don’t file. Never ignore your responsibilities. It’s always better to file late than to avoid filing.
Talk with a Tax Expert
When fear is getting in the way of meeting your tax responsibilities, try talking to a tax professional about your situation. Sometimes, people are worried that hiring an attorney will lead to IRS scrutiny, but again, that’s not the case – the IRS understands that taxpayers want and need competent representation when dealing with the government.
A tax attorney can help you understand the repercussions of late tax returns and your likelihood of an IRS audit. They will also guide you through the steps to take to get your returns filed or to understand your tax relief options.
How Paladini Law Can Help with Overdue Tax Returns
Having unfiled tax returns is a very common problem for taxpayers, so you’re not alone. But if you’re ignoring your overdue returns because of a fear of being audited, rest assured that filing now is always going to be your best option to avoid problems with the IRS.
Filing your outstanding returns shows the IRS that you want to be compliant and take care of your tax responsibilities. It also helps you avoid increasing penalties and interest and the risk of an inflated SFR filed on your behalf.
The Paladini Law team is here to help you through this situation, no matter what your finances look like. We’ll help you get back in good standing by filing your returns and resolving your debt in a way that works for you.
Contact Paladini Law today to set up a consultation with a tax expert today.
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