Unfiled Taxes and What To Do About It
by Dean Ferraro, EA
4:59 read time
"Does the IRS really know if I need to file a tax return?"
"What if I don't file, ever?"
"Are there penalties if I have unfiled tax returns?"
"What if I couldn't afford to pay the taxes when I prepared them so I never filed the return?"
Answer: The easiest answer is that the IRS knows a lot about you and your unfiled taxes.
They also are trained to collect as much as possible from even the biggest deadbeat.
IRS tax problems tend to sneak up on people, much like credit card debt.
Your biggest ally in the battle against the IRS are their budget restrictions.
They can't pay enough IRS employees to look over every return and question every credit or deduction taken. So naturally a lot of things get missed.
You could get away for awhile because of that.
Computers and past due returns
The IRS has more data than Google.
They receive millions of tax returns every year, every day, every week, every month.
They run studies on those numbers.
The IRS knows what the average person makes for every profession in every county or city or even neighborhood.
They even use census.gov data (great site for marketing BTW) to study taxpayers and their incomes, even down to a street by street basis.
I learned this little factoid at a presentation a Census.gov manager gave to our group of tax professionals.
Trust me, it is crazy with some of the tools they have.
Ever wonder how they catch people?
They have data/knowledge and that is power.
Your unfiled taxes are already noted in their files.
Your best weapon: IRS transcripts
Most taxpayers I help don't file because they can't find their records anymore.
I understand that. Life happens.
Things get tossed, papers with SSNs on them go in the shredder. Paper tends to get placed in the round file (trash) rather quickly.
So what do you do when you have unfiled taxes BUT NO RECORDS?
You request your IRS transcripts
Go to irs.gov and request copies.
How IRS transcripts help you solve your unfiled taxes problem
When you make money, the person paying you is usually deducting that amount from their gross income.
In order for them to take that deduction they must:
- file certain forms with the IRS to document the transaction.
- report your SSN or EIN
- report the amounts paid and taxes withheld
- show any amounts saved for retirement
- do so on an annual basis.
This is where you get nailed if you don't file.
The IRS gets records of your income whether you like it or not.
Simply put, if you make money/income in this country, more likely than not, it's being reported to the IRS AND State.
This is where your IRS transcripts come in:
When you identify the years with unfiled taxes from your transcripts, you'll also be able to identify what income you made in those years based on what was reported.
You will know what years were not filed and what income was reported.
Now you can put together a tax return.
It's not perfect, but it is much better than letting the IRS file a Substitute For Return (SFR).
A SFR gives you zero benefits and allows them to assess even higher taxes, penalties and interest.
Oh yeah there's another thing about not filing your tax returns...
Did I mention the 10 Year Statute of Limitations?
In most cases, the IRS has ten years to collect taxes from you.
It's called the CSED or Collections Statute Expiration Date.
However, the 10 year clock does not start until you file or they file an SFR.
So if you never file past due returns, guess what? Your CSED NEVER starts running!
Your tax problem will never go away!
Step One is to figure out your income in those unfiled years
Let's go over some types of income that get reported
The following is a listing of other types of income that are reported by third parties to the IRS each year:
• Your income — If you have been paid over $600 for services rendered as an outside or independent contractor throughout the calendar year, the payer is required to report the total paid to you on Form 1099-MISC, Statement for Recipients of Miscellaneous Income.
Other types of income reported on Form 1099-MISC include:
• Rent and royalty payments
· Prizes and awards that are not for services
· Payments made by medical and health-care insurers to a doctor or other supplier of medical services under an insurance program
· Attorney and accounting fees for professional services
· Witness or expert fees paid by a lawyer during a legal proceeding
· Payments made to entertainers for their services
· All other free-lance income
• Your wages — The IRS receives a copy of your Form W-2 directly from your employer and you are required to attach a copy to your tax return.
Therefore, the IRS knows exactly what you earned in regular income, bonuses, vacation allowances, severance pay, moving expenses and travel allowances.
The IRS also knows about your retirement plan participation.
• Interest and dividend income — Payers of interest and dividends in excess of $10 per year are required to report this information to the IRS using Forms 1099-INT and 1099-DIV, respectively.
You should make sure the information reported on these forms agree with your records.
• Tax refund income — State tax refunds you receive are reported to the IRS on Form 1099-G, Statement for recipients of Certain Government Payments.
Note: If you receive a state tax refund for a year in which you did not itemize your deductions or you did not utilize the full benefit of your state tax deduction, then all or part of your state refund may be excluded from your Federal taxable income.
• Gambling winnings — Generally, payments of $600 or more must be reported by the payer from horse racing, dog racing, jai alai, lotteries, raffles, drawings and slot machines.
Bingo payments of $1,200 or more and Keno payments of $1,500 or more are also required to be reported. These gambling winnings are reported on Form W-2G, Statement for Recipients of Certain Gambling Winnings.
Other income the IRS knows about:
· Cash deposits of over $10,000 made to your bank account.
Banks also look for structuring. Making many smaller deposits under the $10,000 limit. (Drug dealers love structuring cash deposits)
· Fringe benefits received from your company
· Tax shelter participation (TSPs)
· Original-issue discounts (OIDs)
· Money received from broker (security sales proceeds) or barter exchanges (reported on Form 1099-B)
· Distributions from pension and profit-sharing plans, IRA’s, etc. (reported on Form 1099-R)
· Cash payments of over $10,000 received in a trade or business
· Unemployment insurance (reported by the State)
· Social security benefits (reported to the IRS by the SSA)
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