Haven’t Filed Taxes in 10 Years? Don’t File All of Them!
If you haven’t filed your taxes in 10 years, you may be very worried that the IRS will come out of the blue one day and throw you in jail.
And while it is true that under Section 7203 of the Internal Revenue Code, it is a federal crime punishable by prison time to not file a required federal tax return, the IRS’s current policy is to not criminally prosecute those who come clean and file their returns before the IRS comes looking for them, assuming there’s no willful fraud or evasion present.
So it is certainly in your best interest to come clean and get back in the tax system both to avoid criminal prosecution as well as to potentially mitigate penalties that accrue on your account for not filing your tax returns.
You also probably want to get out in front of an IRS lien before they slap one on you — it’s absolutely tragic when we see the IRS finally catch up to folks who are chronic non-filers and the individual or the couple wake up one morning to a notice from the IRS stating that they’ve filed a Notice of Federal Tax Lien against them for tens or hundreds of thousands of dollars. And now their legacy — their assets — that they intend to leave to their children or other heirs are encumbered by this debt.
In another article I wrote titled, “What Happens If You Don’t File Your Taxes?”, I go more in depth about the 12 major consequences of not filing your taxes in general, but in this article, I want to give some straight talk to those individuals who specifically haven’t filed taxes in 10 years by giving them a step-by-step game plan of how to approach their situation for optimal results.
Table of Contents
Step 1: Obtain your wage and income transcripts for all your unfiled years.
Your IRS wage and income transcript for each year is a record of the tax documents that were filed with the IRS for that year such as W-2s, 1099s, K-1s, etc.
I’ll tell you what to do with these transcripts after you get them in a later step, but for now, just obtain them.
You can get up to ten years’ worth of wage and income transcripts online through a free account you can create at the IRS website.
You can also request these transcripts by mailing Form 4506-T to the IRS.
So step one is to simply obtain your wage and income transcripts for all the years during the past ten years that you did not file a tax return.
I will tell you what to do with them later in this article, but for now, let’s move on to step two.
Step 2: Determine if the IRS has filed returns for you.
When individuals with a tax filing requirement do not file a required tax return despite the IRS’s prodding through various notices — typically the CP59, CP515, CP516, and CP518 — the IRS may file a substitute for return (SFR) — for them.
And the IRS generally just prepares these SFRs based on the income reported to the IRS on third-party informational returns and documents such as W-2s, 1099s, K-1s, etc.
And they don’t give you any deductions other than the standard deduction. They do not give you any itemized deductions, nor do they give you any business deductions.
So oftentimes, SFRs will grossly overstate a taxpayer’s liability for the year, especially if they earn a lot of income reported on Form 1099 because the IRS will count that income in calculating the taxpayer’s liability for the year but won’t count any ordinary and necessary business expenses that the taxpayer could take against their income.
So if you haven’t filed in a number of years, the next thing I would say you should do — and we do this as a matter of course Choice Tax Relief for our clients who haven’t filed in a number of years — is determine which of the unfiled tax years, if any, that the IRS prepared one of these SFRs.
And then after you determine which years the IRS prepared an SFR for, you have to determine whether or not it would be in your best interest to file your own tax return to replace that SFR — but that’s step three.
Let’s stay here in step two for a few more minutes and discuss how to determine if the IRS has filed an SFR for you.
And there are actually a few ways to do that, including:
- Checking online
- Checking your account transcripts for your unfiled years
- Calling the IRS
I go over in detail all of these methods to determine whether the IRS has filed an SFR for you in my article specifically on SFRs, so be sure to check out that article for more information.
Step 3: Determine which of the SFR years you should file.
Now, once you’ve determined the population of tax years for which the IRS filed an SFR for you, you need to figure out whether it’s in your best interest to file returns for all, some, or none of those SFR years.
I’ll get to the non-SFR years here in a moment as well as some tips on filing these old returns, but for now let’s talk about the SFR years. Should you file tax returns for the years for which the IRS has filed an SFR for you?
I would say that in general it makes sense to file a return for an SFR year. There are exceptions, but here are three good reasons why replacing the IRS’s SFR with an actually-filed return might be a good idea:
- As I mentioned previously, SFRs usually overstate a taxpayer’s liability because they’re counting all the reported income but no deductions other than the standard deduction, so filing a return to replace an SFR often results in a lower tax liability for the year.
- Although the IRS’s assessment of tax based on an SFR — which could happen years after the SFR is actually prepared (believe it or not) — starts the clock on the IRS’s 10-year collection statute to collect a tax debt, it does not start the clock on the IRS’s 3-year statute to assess a tax debt. So theoretically the IRS could come back at any point in the future and revisit that tax year if you never file a return for that year. But if you file your return, the IRS generally only has three years to go back and audit that return unless there’s fraud involved, though there are some exceptions such as fraud and if the the taxpayer omits greater than 25% of their gross income from the tax return.
- Although Internal Revenue Code Section 6020(b)(2) states that SFRs are “prima facie good and sufficient for all legal purposes,” Internal Revenue Manual Section 18.104.22.168.3.2.1(2)(b) states that for purposes of obtaining first-time abatement for a penalty in which the taxpayer must be in compliance and penalty-free for the three previous years before the year for which the penalty abatement is being sought an SFR being prepared by the IRS does not count as being compliant. So if a client would qualify for first-time abatement for a penalty but for the filing of the SFR, we may choose to file a return for that year. That is a fairly rare circumstance though because in order for that situation to materialize, the taxpayer would have had to have no balance for the SFR year, which is theoretically possible for a number of reasons but is certainly not typical.
Now, why might I not file an SFR year for a client? Here are some reasons going the other way:
- Doing so would increase the taxpayer’s tax liability for the year. This is rare, but it is sometimes the case.
- The client is a good offer in compromise candidate. If the client’s eligible for a $5,000 offer in compromise (for example), and they’re going to settle their debt for $5,000, it doesn’t make a difference to them if we lower their liability by filing a return to replace an SFR. And in fact, in a few cases, reducing a taxpayer’s liability for a year could make them a less-likely offer in compromise candidate. I may write an article about those situations someday.
- The debt for an SFR year is going to fall off soon due to the IRS’s 10-year collection statute. The IRS only has 10 years to collect a debt — though that amount of time can be extended for certain events called tolling events — but if the IRS’s deadline to collect the tax debt assessed based on an SFR is going to fall off soon, I may not want to bother with filing an original return for an SFR year.
So there’s no cookie-cutter answer here as to whether you should or should not file an actual tax return to replace an SFR for a given year — this is obviously something we analyze in detail for our clients — but those are the major factors that you should be considering.
Step 4: Determine which of the non-SFR years you should file.
So at this point you’ve figured out which of the SFR years you should file returns for.
Now, let’s talk about the non-SFR years. Should you file returns for these years?
The 6-Year Rule
Well, right off the bat, I would say that for non-SFR years older than six tax years ago, you shouldn’t file them.
Because the IRS in Policy Statement 5-133, which you can read in Internal Revenue Manual Section 22.214.171.124.18, says:
“Normally, application of the above criteria will result in enforcement of delinquency procedures for not more than six (6) years. Enforcement beyond such period will not be undertaken without prior managerial approval. Also, if delinquency procedures are not to be enforced for the full six year period of delinquency, prior managerial approval must be secured.”
So this is a policy statement about enforcing the IRS’s filing requirements on individuals who have delinquent returns, i.e., people who haven’t been filing their required tax returns.
And this is saying that the IRS will, in general, consider a taxpayer in compliance with their filing requirements if they have filed the last six years of returns to the extent required.
When the 6-Year Period Moves Forward
The six-year compliance window moves ahead another year when electronic filing opens in January of every given year.
So, for example, when e-filing opens in January 2025, the six-year compliance window would at that point be the years 2020-2025.
This means that if you’re mapping out what returns you should be filing in, say, November or December 2024, you may very well be able to ignore the 2019 tax return — assuming you have a little bit of time to spare — because it will only be part of the six-year compliance period for another month or two.
Now, if you’re following along closely, you might be thinking, “But Logan, you just told me a few minutes ago that the IRS could always come back and assess tax for a tax year if you never file a tax return for it.”
And that’s true. But here’s the kicker.
SFRs — which would be the means by which an IRS would assess a tax on a year for which you didn’t file a return — are overwhelming prepared by the IRS’s Automated Substitute for Return (ASFR) Program.
And Internal Revenue Manual Section 126.96.36.199.2 describes the criteria for a tax year — referred to as a “module” in the manual — to be considered to have an SFR prepared for it by the ASFR program.
And the first criteria is that the tax year “is not older than five years prior to the current processing year.”
And this dovetails nicely with the Policy Statement 5-133 that I just told you about.
So it is the IRS’s current policy, in general, to not prepare SFRs for years older than five years prior to the current processing year.
And if it’s 2023, the current processing year is 2022; and if it’s 2024, the current processing year is 2023; and so on and so forth.
Now, just to be clear — Policy Statement 5-133 and the IRS’s ASFR criteria are not law; they are merely policies that the IRS has unilaterally adopted.
And could the IRS unilaterally change them at a future date? Certainly they could.
So there is a small degree of risk that the IRS will in the future change these policies, but that is not an expectation that I believe will occur any time soon.
What About Returns Within the Last Six Years?
So we’ve established that in general, it’s not a good idea based on current IRS policy to file tax returns for non-SFR years before the past six years of returns.
What about for years within the past six years? Well, if you want to get in compliance with the IRS from a tax filing perspective — which the IRS will require of you if you want to entertain a resolution such as an offer in compromise or an installment agreement — you’ll need to file all of the past six years’ worth of returns to the extent required.
So the first thing you’d want to do is look at your wage and income transcripts you pulled in step one as well as your own records — if you have them (some can be estimated) — to determine which of these years you have a filing requirement for.
So in general for most non-dependent taxpayers, you have a tax filing requirement for a given year if your gross income during that year — not your taxable income, but your gross income — is greater than or equal to the amount of your standard deduction for your filing status and your age and your spouse’s age if you file jointly with them but not including the increased standard deduction amount for blindness.
However, if you have self-employment income, the threshold to file a return is if your net earnings from self-employment — that includes your business deductions — are at least $400 during the year.
There are other things that could trigger a filing requirement as well, but those are the general rules.
So, if I were you, I’d basically look through your wage and income transcripts for the past six years and — to make it simple — look for the years in which your gross income based on the wage and income transcripts exceeds your standard deduction amount for the year not including the increase for blindness.
And those are the years that you have a filing requirement for in order to be considered compliant by the IRS.
If you have 1099-MISC, Box 7 income or 1099-NEC income, you may want to consider yourself having a filing requirement for those years as well because the IRS doesn’t know about your business deductions.
A Word About Refunds
Now, you may still want to file a return for a year that you don’t have a filing requirement for if you will be getting a refund for that year because you either qualify for some refundable credit and/or you had federal income tax withheld from your wages or some other income source.
Keep in mind, though, that the deadline to get a refund for a tax year is generally three years from the original due date of the return, which is typically in April of the year following the return year.
There’s an exception to that if you made a payment for that year in the two-year timespan before you file the return for that year — you could conceivably get a refund for that year up to the amount you paid for that year within that two-year window.
So this stuff can get quite complicated, especially if you have a situation where you have these older years with SFRs but you also have refund years that may be coming up against the statute, and that’s why when we start working on a case for someone who hasn’t filed their taxes in 10 years or five years or something like that, we start by putting together a game plan for their resolution.
Step 5: File the returns you decided you should file.
Now comes the fun part — actually filing the returns that you strategically decided you should file.
So for most people who want to resolve their IRS issues, these are basically going to be the years for which the IRS filed an SFR and you believe it to be in your best interest to file a return for that year and the years for which you have a filing requirement within the past six years as well as the years you could get a refund for even if you don’t have a filing requirement.
I’m not going to get into the nitty-gritty of how to file these returns and the ordering strategy because I’ve actually covered all that in another article titled, “How to File Back Taxes, Avoid Penalties, and Get Your Life Back on Track.”
That article is an ultimate guide on how to file your back taxes, so if you’re at this step, I’d suggest you read it.
Step 6: Seek penalty abatement.
For most of our clients with penalties on their account, we at least seek some sort of penalty relief for them.
Sometimes the IRS grants it; sometimes they don’t.
But it’s generally at least worth a shot.
For more information about seeking abatement for the penalties on your account, check out this article.
Step 7: Pay the balance due or seek tax relief.
Finally, you have to figure out what to do with the amount you owe the IRS after you’ve cleared up any disagreements with them concerning the amount as well as obtained any possible penalty relief for your account.
You can, of course, pay off your balance in full. This will (obviously) stop future penalties and interest from accruing.
However, a better option — if you qualify for it — is an offer in compromise. An offer in compromise is an agreement you make with the IRS in which the IRS agrees to accept a lower amount to satisfy your tax debt than you actually owe.
That said, not all taxpayers qualify for an offer in compromise, so there are other options, such as a temporary hardship placement called currently not collectible status as well as installment agreements for taxpayers who wish to pay their balance over time.
For an overview of how tax relief works, read our article What Is Tax Relief and How Does It Work?.