Haven't filed in years: how to catch up without making it worse

There is no deadline for filing a late return, but there is a deadline for collecting a refund from one. Catching up is a sequence, and the first step is finding out what the IRS already has.

There is no deadline to file a late return

A return you owe on can be filed and assessed years after it was due. Nothing about the passage of time makes an unfiled year go away, and nothing about it makes the return harder to accept when it finally arrives.

The asymmetry is on the other side. A refund you were owed does expire, and it expires quietly. That is the whole shape of this problem: waiting costs you money you were owed and saves you nothing on money you owe.

The refund you lose by waiting

A refund has to be claimed within 3 years of the return's due date. After that the money stays with the government, however correct the return would have been.

It applies to withholding your employer already sent in, to estimated payments you made yourself, and to refundable credits such as the earned income credit. People who stopped filing because they assumed they owed something are often the ones losing the most, because the withholding was already there.

What the IRS does when you do not file

It may prepare a return for you. A substitute return is built from what payers reported, and the IRS itself only says that such a return might not carry the deductions and exemptions you were entitled to, because it is put together without the details that only you hold. The tax it proposes is usually higher than the tax your own return would have produced.

What follows is a notice of deficiency proposing the assessment, with ninety days to file your own return or to petition the Tax Court. If nothing is filed and the balance goes unpaid, collection can reach wages and bank accounts and produce a federal tax lien. Reading an IRS notice covers how to place the letter you are holding.

How many years to file

There is no published rule that fixes the number. The IRS decides how far back to require returns case by case, weighing what is owed, what it already has on file and what the enforcement history looks like, and its practice concentrates on recent years.

Treat the number as a judgment call rather than a formula, and get advice on it if several years are involved. Anyone who tells you there is a fixed count that applies to everyone is stating a rule of thumb as though it were law.

Rebuild the years from transcripts

The paperwork for an old year is usually gone, and it does not need to be found. A wage and income transcript shows what employers, banks and other payers reported to the IRS for that year, which is generally enough to prepare the return.

Those transcripts are available for the current year and several prior years through an online account. How to get IRS transcripts covers the five types and which one you need, and creating an IRS online account covers getting in.

The order to file in

Start with the years whose refunds are still inside the claim window, because those are the only years where another month of delay costs money that cannot be recovered later.

After that, get the current year filed. Filing it stops a new failure-to-file penalty accruing on that year, which is worth doing before you work backwards through the older ones. It does not stop anything on the older years: penalties and interest on an old balance keep running until that particular year is filed and paid. Beyond those two priorities the order matters less than the fact of moving.

Penalties, and the relief that exists

Failure to file and failure to pay are two separate penalties, and interest runs on top of both. That is why a late year grows even when the underlying tax was small.

Relief exists in two general shapes. There is a route for a taxpayer whose record is otherwise clean and this is a first lapse, and there is a route based on reasonable cause, where circumstances outside your control explain what happened. Both are requests rather than entitlements, and both are worth raising once the returns are in rather than before. You owe more than you can pay right now covers the payment side.

What happens after you file

Your returns replace the substitute assessments, and the balance is redone on the real numbers, which for most people is lower. From there the account behaves like any other account with a balance: notices arrive in their usual sequence, payment arrangements are available, and the years close one at a time as they are paid.

When to stop doing this alone

Several unfiled years, a business or rental income in any of them, a substitute assessment already in collection, or a notice about a levy are all points to bring in a preparer or a representative. What they change is the handling: someone who can talk to the IRS on your behalf, order the record, and sequence the filings. Nobody can promise you a particular outcome, and an honest one will not try.