Filing non-compliant taxpayers and their tax professionals commonly ask this question when filing back returns: how far back do I need to file?
If you are a taxpayer who is required to file a tax return but has not filed in a long time, you may want to stop and consider IRS Policy Statement 5-133. IRS Policy Statements contain IRS internal standard operating procedures on how the IRS will work to administer the nation’s tax laws.
It is the taxpayer’s legal obligation to file an accurate tax return if they are required to do so. Failing to file or filing an inaccurate return carries stiff penalties. If it is intentional, the IRS can also pursue criminal penalties. But when it comes to filing back returns, PS 5-133 may offer some relief to taxpayers.
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If a taxpayer has not filed in many years, PS 5-133 may dictate that the taxpayer needs only to file the previous six years to be in IRS compliance. Taxpayers who try to go back to earlier years may want to check with the IRS first before filing. The IRS may not want the earlier returns to consider you in compliance. How do you know? You ask the IRS.
There is one word of warning here: PS 5-133 has several exceptions:
Override by a manager: an IRS manager may override PS 5-133 and request more returns if there are extenuating factors such as a prior history of noncompliance, illegal income sources, higher income and collectibility of the tax, and future compliance. The most common red flags are Forms 1099-MISC for business income, large amounts of investments sold, and little withholding and estimated tax payments. How do you know if there is an override? You ask the IRS.
Business taxpayers: the IRS does not like to give businesses a pass on nonfiling. They believe that it gives the nonfiling taxpayer a competitive advantage over other businesses. As such, they like all businesses to file all required returns. The IRS frequently requests the taxpayer to file overdue payroll tax returns and partnership returns past the six-year requirement.
Local nonfiler enforcement by IRS collections: the most likely scenario when the IRS deviates from PS 5-133 is when nonfiling is investigated by a local IRS person- called a Revenue Officer. Revenue officers are likely to be assigned the most egregious nonfilers and collection cases and often perform in-depth investigations and request more years to be filed. IRS notices indicate if a Revenue Officer is investigating the nonfiler. The “RO” can be quick to get their manager to approve a deviation from PS 5-133.
There is not an IRS document, like an IRS transcript, that you can request to see how far back that you are required to file. To find out you must ask. In most cases, an experienced tax pro who has access to a special IRS practitioner hotline can find out best. They can also obtain your account information and old W-2s/1099s to help with back filing.
Keep in mind, the IRS will always accept any back return that you file. If you want to potentially limit your liability, penalties, and a lot of work in filing past the six-year requirement, find out how PS 5-133 applies to your circumstances.
Some tips for nonfilers – and late filers too
The IRS knows of at least 7.5 million nonfilers each year when it tracks W-2s, 1099s, and other information statements back to taxpayers. Potentially, there are millions more who don’t get information statements.
Nonfiling is a serious issue that often can work the IRS up into a frenzy. If the IRS determines that the nonfiler was intentional, they can pursue criminal penalties. Al Capone was not convicted of filing a fraudulent return – he was convicted on nonfiling of a return. Taxpayers who have not filed a required return should do so immediately. Here are 8 tips that will help you file your back returns successfully and minimize the damage:
Apply IRS Policy Statement 5-133: As a general rule, the IRS only requires that you file the past six years returns (exceptions apply). Confirm that the IRS is looking for only six years of returns. Contact the IRS directly to confirm the required unfiled years.
Beware, the IRS may have already filed a return for you. When you don’t file a return, the IRS sends a series of notices over a three-year stretch requesting that you file. If you do not file, the IRS can file for you. This return is called a substitute for return (SFR). The return always ends in you owing the IRS taxes, penalties, and interest. However, you can file an original return to “replace” the SFR. This return will come under increased scrutiny by the IRS and go through a special filing process that can take up to six months to complete.
Late returns often require special processing at the IRS. Each November, the IRS starts requesting many nonfilers about the status of their return. If the IRS selects the taxpayer for a delinquent return investigation, the taxpayer will usually have to file directly with the investigating unit at the IRS.
Order your IRS transcripts to help with filing. It is extremely important to prepare an accurate return that matches the income that the IRS has in its records. You can trace your income history and request your wage and income (Forms W-2, 1099, etc.) transcripts from the IRS. When preparing your return, make sure all income items on the transcript are reported accurately. Without this match, the IRS can question the accuracy of your return or even audit the return. IRS account transcripts can also help you track down any estimated tax payments that you can credit to any tax balances you owe.
Nonfiling penalties apply if you owe. There can be hefty penalties for filing late. Years with tax balances due will have penalties, such as the failure to file and failure to pay penalties. These penalties combined can accumulate, over time, up to 47.5% of the tax bill. Interest will also accrue on both the taxes owed and the penalties assessed.
Consider asking for penalty relief. If you have a good reason why you are not able to file on time, you can ask the IRS not to charge you failure to file or pay penalties on balance-due returns. You can also ask for first-time abatement for the first year if you qualify.
If you owe and can’t pay, set up a payment agreement with the IRS. Taxpayers who cannot afford to pay the balance will have to make arrangements with the IRS. There are several types of agreements, depending on what you need. If you don’t establish some type of payment plan with the IRS, IRS collection problems will follow.
Old refunds prohibited: The IRS doesn’t pay old refunds. You can only claim refunds for returns filed within three years of the due date of the return. For example, if you file a 2014 return after 4/15/2018, your refund will be lost.
Your first step is to commit to filing all required back returns and get into an agreement with the IRS on the balanced owed. The next step is to contact the IRS and get your information and see how many back returns are required. You will use this information to file an accurate return at the right location at the IRS. You may also have to file State returns. Lastly, weigh your options on any balance owed, including requesting abatement of penalties, and get into an agreement with the IRS that leaves you in good standing and sleeping better at night.
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