What is unfiled past-due returns (or back tax returns)?  

Taxpayers who do not file a required tax return can face IRS delinquent return enforcement actions.  These actions can include requests to file and other more serious enforcement activity such as filing a return for the taxpayer and criminal investigations.    Taxpayers can face serious penalties for late filing, including a 5% per month late filing penalty (up to 25%).  In order to get back into filing compliance, the taxpayer should follow IRS procedures and utilize several best practices to resolve their late filing issue.

What do you need to know about IRS enforcement of unfiled past-due returns?

A few important items about unfiled and past-due tax returns:

  • Taxpayers with a filing requirement need to file a timely, accurate annual tax return:  non-filing can cause serious IRS enforcement action, including both civil and criminal investigations.  
  • The penalties for late filing can be substantial but can be abated under first-time abatement or for reasonable cause:  for individual returns, late filing penalties only apply if you owe additional tax.  However, the penalties can be significant- 5% per month, up to 25%.  Fraudulent failure to file is 15% per month, up to 75%.  Taxpayers can request relief for the first year of late filing penalties if they have a clean compliance history for the prior three years using the IRS’ first-time abatement waiver.  If the taxpayer does not qualify for first-time abatement, they can request relief if they can show that they had unforeseen circumstances outside of their control that caused the late filing (reasonable cause argument).
  • For individuals, the IRS usually only requires that you file the current and last six tax years to be filing compliant:  IRS Policy Statement 5-133 only requires individual taxpayers to file the past six years of returns.  The IRS can deviate from this policy if they believe the taxpayer will owe significant amounts in years prior to the last six tax years, if the taxpayer is a business, or if the taxpayer has a history of significant noncompliance.  Normally, deviations to the policy originate when the taxpayer is assigned to IRS field collection (i.e. a revenue officer).
  • IRS transcripts can help you file an accurate prior year return:  the IRS can provide you wage and income information by year (called an IRS wage and income transcript) as well as an account transcript to show any payments or credits.
  • If you do not file a return, the IRS can file one for you – and you will owe taxes, penalties, and interest:  this return is called a “substitute for return” or “SFR.”   The IRS will prepare and process a balance due return that only includes the taxpayer’s income and withholdings – no deductions, preferred filing status, or credits are allowed.  Taxpayers can use special procedures to file an original return to replace the SFR return.
  • The IRS can freeze future refunds:  taxpayers who do not file a required return can face IRS refund freezes on returns filed in future years.
  • Late filers may have to use special IRS procedures to file their returns:   some procedures include matching their return to IRS income records and filing their return directly with the enforcement function (Collection, audit, etc.) at the IRS.
  • Late filing is enforced by IRS Collection employees:   these investigations are called taxpayer delinquency investigations or return delinquency investigations.  IRS Collection employees (revenue officers and Automated Collection staff) are responsible for pursuing non-filers.   However, all IRS enforcement personnel (audit, collection, etc.) can pursue enforcement against a non-filer.

Questions we hear often:

Background on unfiled past-due returns

How often does it happen?  Each year, between 8-12 million taxpayers do not file a required tax return.  The IRS conducts millions of delinquent return investigations each year.  Some taxpayers are limited to receiving delinquent return notices (IRS notice CP 59).  In some circumstances, if the taxpayer does not file, the IRS will proceed to file on their behalf and/or pursue other enforcement action.  At the end of 2018, the IRS had 1.77 million open taxpayer delinquency investigations. 

How long does it take to resolve? 3- 12 months.  Filing a return at the beginning of the return investigation will only take about 3 months to complete if the return requires paper filing.  If the IRS starts a formal taxpayer delinquency investigation and/or files a substitute for return for the taxpayer, it can take up to a year for the IRS to accept the filed return to replace the SFR.

Questions we hear often:

Most likely solutions for resolving unfiled past-due returns

Utilizing late filing procedures to file a late return:  file an accurate, late return with the IRS which comply with IRS delinquent return filing instructions.  This solution is usually precipitated by an IRS delinquent return investigation.

Filing over a substitute for return filing (SFR reconsideration):  once the IRS begins or completes the process of filing a delinquent return for the taxpayer (substitute for return) using information in the IRS’ possession (Forms W-2, 1099, and other third-party information collected), the taxpayer will need to file an original return to replace the SFR.  This solution requires that you work directly with IRS Collection and/or the Automated Substitute for Return function to have the return accepted.

Other potential solutions for resolving unfiled past-due returns

No filing requirement response:  when the taxpayer receives a delinquent return notice from the IRS (usually IRS notice CP 59), they will need to determine whether they have a filing requirement or have filed the return.   Taxpayers should research their IRS account and income reported to the IRS by contacting the IRS directly and also obtaining their IRS wage and income transcripts.   If the taxpayer has filed or does not have a filing requirement, the taxpayer should complete Form 15103, Form 1040 Return Delinquency, and explain their circumstances to the IRS.  If the taxpayer has already filed a return, they should attach a copy with this response.

Request removal of IRS filing requirement: Form 15103 can also be used to request the IRS to delete the taxpayer’s filing requirement.   Some delinquent return inquiries are based on the fact that the taxpayer filed in a prior year.  It may be necessary to explain to the IRS that you do not have a filing requirement for that year.

Employment-related tax identity theft:  taxpayers who are victims of employment related tax identity theft (i.e. when an  identity thief steals a taxpayer’s social security number for employment and W-2/1099 income is erroneously reported to the victim) can be subject to false delinquent return investigations.  Taxpayers who have wages or other income reported under their SSN need to resolve the identity theft issue with the IRS and also work with the IRS to remove their filing requirement.  This often can happen to elderly taxpayers who do not meet the income filing requirement thresholds.

Steps to resolve an unfiled past due return(s)

Here are the steps to follow to resolve a past-due unfiled tax return:

  1. Confirm a required return has not been filed:   review your tax documents to determine if you were required to file and/or have filed an accurate return under your SSN.    If a return was not required to be filed or has been filed, you will need to respond to the IRS and request the filing requirement/delinquency inquiry be deleted. Taxpayers can use IRS Form 15103, Form 1040 Return Delinquency, for this response.   Business taxpayers will need to contact the IRS directly to remove the filing requirement.  In most cases, IRS delinquent return inquiries start because the taxpayer does not have a record of filing AND the IRS has income reported under the taxpayer’s social security number that indicates there is a filing requirement.
  2. Contact the IRS: you will need three items from the IRS –  transcripts to file an accurate return, an extension of time to file to avoid enforcement, and any special filing instructions.   The taxpayer should order an IRS account transcript and an IRS wage and income transcript (shows all W-2s, 1099s, etc.) for the year(s) in question.   Analyze the transcripts, the payments made to the IRS, and the income reported to the IRS for accuracy.  In some cases, the taxpayer will find erroneous Forms W-2 or 1099 that need to be corrected to resolve the delinquent return inquiry.  The taxpayer may also find employment-related tax identity theft if someone is fraudulently using the taxpayer’s social security number for work purposes.  The taxpayer can also ask the IRS for any additional time to resolve the late filing return.   The extension of time can avoid further enforcement letters and the filing of a premature substitute for return.  The taxpayer should also ask about specific filing instructions to resolve the matter.
  3. Gather your original tax documents to file:  if the taxpayer needs to file their past-due return, they will need to gather their tax information for the year(s) in question.
  4. Complete your return(s): after completing the return, the taxpayer will want to make sure that their return includes all of their Forms W-2, 1099, etc. on  their IRS wage and income transcript for the year. This reconciliation will identify any discrepancies that will need to be addressed in order to file a correct return.  If the return does not include or explain the omitted reported income items, the IRS can question the return through an audit or notice.
  5. Prepare a penalty non-assertion letter for penalty relief, if applicable:  you can protest any late filing penalties by providing the IRS the unforeseen circumstances outside of your control that caused you to file late.  You can attach a request to not assert the late filing penalty with the filed return (if filing by paper).  If the IRS ignores the penalty relief request, you will get an opportunity to request abatement after you receive the first IRS assessment letter (usually IRS notice CP 14).   Serious illness/incapacitation, lack of information returns needed to file, and ignorance of the tax law are common arguments against the late filing penalty.  Financial hardship and reliance on a tax professional are not good arguments for late filing.
  6. If there is a balance owed, determine your collection alternative:   if you cannot pay, you will need to determine your best collection option (extension to pay, payment plan, currently not collectible hardship status, or an offer in compromise).  If a payment plan is needed, you can attach a Form 9465 to the return to request an installment agreement. If the penalties and interest are not paid with the late return, the IRS will send a notice with any additional interest and penalties after the return is processed.
  7. File the return to the proper IRS location: if the taxpayer is timely in responding before the IRS response date on the notice, they can file at the location noted on the notice.  If the taxpayer misses the notice deadline, they should contact the IRS for any special filing instructions.  This will expedite the review and acceptance by the IRS. 
  8. Monitor the processing and acceptance of the return:  IRS operations sometimes have issues with processing late returns.  Taxpayers should monitor their notices, IRS account transcripts, and periodically contact the IRS to make sure that the return was received and is being processed.  The IRS may have questions related to the late filed return (late filed returns, especially those filed on paper, receive more scrutiny from the IRS).  If there has been a prior assessment and collection activity, the taxpayer should periodically request a collection hold on the account until the return is processed and accepted. 
  9. If applicable, set up a collection alternative and follow up on any collection alternatives:  if alternative collection options are needed – such as a payment plan, an extension to pay, or other hardship solutions (currently not collectible or an offer in compromise), the taxpayer will need to act quickly after the tax is assessed to avoid IRS collection enforcement.

Questions we hear often:

Can you appeal a disagreement with the IRS over an unfiled past-due return?

If the IRS proceeds to file a return for the taxpayer (i.e. a substitute for return), the taxpayer will have the ability to appeal any deficiency proposed with the SFR filing. SFRs, like audits, follow deficiency procedures which allow the taxpayer to timely appeal any proposed deficiency before it is assessed and paid.  In reality, most taxpayers who file an original return during the SFR process have their returns accepted if the return includes all items reported to the IRS and there are no large, unusual, or questionable items on the return. 

Best practices for filing back returns

A taxpayer should use these best practices to resolve a late filed return:

Use IRS wage and income transcripts to file an accurate return.  Late filed prior year returns are closely screened by IRS tax examiners before acceptance to make sure that all income items reported to the IRS (Forms W-2 and 1099) are included on the return.  Taxpayers can pre-screen their returns for accuracy by obtaining their IRS wage and income transcripts directly from the IRS and confirming these items were reported accurately on their return.  This will speed up the acceptance of the return as well as reduce the likelihood of an audit or discrepancy notice.

Monitor processing and acceptance. The IRS can take 4-6 months to accept a return as filed – especially if the return is paper filed or if the IRS has current or prior SFR enforcement activity.  Taxpayers should periodically contact the IRS (i.e. every month) to check on the status of the filed return.

Request a collection hold to allow to process a return when an SFR has been filed.    Taxpayers with an SFR filing will have a balance owed to the IRS.  The taxpayer should request a collection hold to avoid collection enforcement during the time period in which the IRS is reviewing and determining acceptance of the late return.

Only the current and past six years need are required to be filing compliant.    The IRS usually only requests individual taxpayers to file the current and six prior years’ returns to be compliant.  However, the taxpayer should file any prior tax year in which the IRS filed an SFR.   Taxes owed from an SFR can usually be lowered by filing an original return that claims additional deductions and credits not allowed in an SFR.  Taxpayers who want to know how many years the IRS requires should ask the IRS.  If the IRS requests more than the prior six years, the taxpayer should confirm that the IRS has made a deviation from their normal six-year policy.   Deviations from the six-year policy rule require an IRS manager approval.

Questions we hear often: