If you have unfiled tax returns and owe the IRS money, doing nothing can be one of the most expensive decisions you make.
I see this all the time.
Someone gets behind on one tax return. Then another year passes. Then another.
Eventually, they become afraid to find out how much they owe.
So they wait.
Unfortunately, waiting usually doesn’t make an IRS problem disappear. Penalties and interest can continue to add up, and the IRS may eventually calculate a tax liability without the benefit of many of the deductions and credits you could have claimed yourself.
The better approach is usually simple:
Find out where you stand. Get the missing returns prepared. Then determine what you actually owe and what needs to happen next.
What Happens If You Don’t File Your Tax Returns?
If you owe tax and don’t file your return on time, the IRS can assess a Failure to File penalty.
For many individual income tax returns, that penalty is generally 5% of the unpaid tax for each month or part of a month the return is late, up to 25%.
There may also be a Failure to Pay penalty.
And interest continues to accrue on unpaid tax.
That means ignoring a $10,000 IRS problem doesn’t freeze it at $10,000.
The balance can keep growing while you wait.
This is one of the biggest reasons I tell people with unfiled tax returns not to let fear determine their next move.
You don’t need to solve everything today.
But you do need to understand the problem.
The IRS May File a Substitute for Return
Another common misconception is:
“If I don’t file, the IRS won’t know what I owe.”
That’s not necessarily true.
The IRS receives information from employers, banks, investment companies, customers, payment processors and other sources.
If you don’t file a required return, the IRS may eventually prepare what is called a Substitute for Return, or SFR.
An SFR is the IRS’s calculation of your tax liability based on information available to them.
And that calculation may not be favorable to you.
Why a Substitute for Return Can Cost You More
The IRS isn’t preparing your tax return the way I would prepare it for you.
For individuals, an SFR generally allows the applicable standard deduction. But many other deductions and credits aren’t included unless you file your own return and claim them.
This can be especially important for self-employed taxpayers and small business owners.
Imagine you received $100,000 of gross business income.
That doesn’t necessarily mean you made $100,000.
You may have had legitimate business expenses that substantially reduced your taxable profit.
If those expenses aren’t reflected in the IRS’s calculation, the tax assessment could be significantly higher than the amount you would owe after filing an accurate return.
Gross income and taxable profit are not the same thing.
That’s why filing your own accurate return matters.
You Could Also Lose a Tax Refund
Here’s something many people with unfiled tax returns don’t realize:
The IRS might owe you money.
Being behind on your taxes doesn’t automatically mean every missing year has a balance due.
You might have had taxes withheld from your paycheck.
You might have made estimated payments.
You might qualify for credits.
But there are time limits for claiming refunds.
Generally, federal tax refund claims are subject to a three-year/two-year statute of limitations, with certain exceptions.
Wait too long and a refund that could have been yours may no longer be available.
That’s another reason to find out what your missing returns actually show instead of assuming the worst.
Can You Resolve IRS Debt If You Have Unfiled Tax Returns?
This is one of the most important questions I get.
Filing your required tax returns is an essential first step toward IRS resolution.
Until the missing returns are prepared, you may not even know the correct amount you owe. Get compliant first. Then deal with the balance.
So if you’re searching for IRS tax debt relief while several years of returns remain unfiled, we will need to address the missing returns first.
Compliance comes before resolution.
Once we understand what needs to be filed and determine the actual amount you owe, we can evaluate the resolution options that fit your situation.
What Should You Do If You Have Years of Unfiled Tax Returns?
Start with facts.
Not fear.
I generally want to answer four questions:
- Which tax returns actually need to be filed?
- What income has the IRS already reported under your Social Security number or business?
- What legitimate deductions, expenses and credits should be included on the missing returns?
- After the returns are prepared, what do you actually owe?
Once we know those answers, the problem becomes much easier to manage.
Instead of worrying about an unknown IRS problem, you have numbers.
You have options.
And you have a plan.
Can a CPA Help With Unfiled Tax Returns?
Yes.
A CPA can help determine what returns need to be filed, reconstruct missing tax information, and prepare delinquent returns accurately.
More importantly, you don’t have to figure out the IRS process by yourself.
I’ve been a CPA since starting my own practice in 2001, and one of the areas I focus on is helping individuals and business owners resolve IRS tax problems.
My approach is straightforward:
Get compliant. Understand the numbers. Know where you stand.
No unnecessary complexity.
No promises about settlements before we understand your financial situation.
Just a clear process for fixing the problem.
Don’t Let Unfiled Tax Returns Become a Bigger IRS Problem
If you owe the IRS more than $10,000 and have unfiled tax returns, waiting can make the situation more difficult.
Penalties can grow.
Interest can continue accumulating.
The IRS may prepare a Substitute for Return.
And opportunities to claim refunds can eventually expire.
The important thing is that an IRS problem is usually easier to address once you stop avoiding it and start working through it systematically.
You don’t need to fix everything in one day.
You need to take the first step.
Need Help With Unfiled Tax Returns?
I’m Josh Cahan, CPA, based in Charlotte, North Carolina, and I work with clients remotely as well.
If you have unfiled tax returns, have received an IRS notice, or owe the IRS more than $10,000, let’s figure out what you’re dealing with and what options are available.
Book a confidential consultation with Josh Cahan CPA.
Clarity first. Resolution next.