Each year we are asked by clients to help them get caught up on unfiled tax returns. Sometimes this is due to an IRS letter or a previously unnoticed tax lien, a garnishment or just because they would feel better if the returns were filed.
You might be surprised to learn that about 40% of past due returns we file result in a refund, especially when dependents are on the return. My favorite example of this is a client who had attended a new employee orientation for a government job with a substantial increase in pay over her previous job. She had several years unfiled taxes and was told that if the past due returns were discovered, she would be fired due to security risk concerns. That afternoon she was in our office and told us there were 7 years of returns due and wanted to know how fast could we get them done. As it turns out, it took a few days to collect all of the information but when all was said and done, she had a net refund of over $8000. and she got to keep her job.
She was lucky because the high refund returns were in the recent years. You should be aware that while the IRS can collect taxes due for 10 years after a return is filed and taxes are assessed, you can only get a refund for up to 3 years after after the due date of the unfiled return that shows a refund due. So right now, if you had an unfiled return for 2016 with a refund coming, it’s too late. That return was due on April 15th, 2017 and would have to have been filed by April 15th, 2020 to still be eligible to collect the refund. We are beyond that date. If you have unfiled returns for 2017, 2018 or 2019 with a refund due, you can still collect on all 3. The 2017 return was due on April 15th, 2018 so you have until April 15th 2021 to file that year and still collect refunds due.
One of the myths we run into is that once a return is prepared, it has to be filed right away. Certainly if you have a refund coming, you would want to do so. Especially if it was close to a deadline for being able to claim the refund. But it is common for those with 2 years of more of unfiled taxes to file the returns with refunds due first before filing the returns where a tax is owed. You will collect your refund as long as there is not a tax bill already assessed or things like unpaid child custody payments or unpaid student loans on your Federal record.
If you are responding to an IRS letter, your choices are fewer. They may have filed for you and assessed a tax due or you could be looking at liens or levies or garnishments. In that case, you are probably going to have to file all of the returns within a few days of each other. Typically, you have 30 days to respond, though we can usually get a bit of an extension if needed, as long as communication is good between the taxpayer and the IRS.
So, what happens if you owe money for all of those unfiled returns?
Surprisingly, you will probably have several options.
- You could file an offer in compromise, the crown jewel of payment plans because you could end up owing nothing. However, less than 1% of tax debts are settled this way. They are difficult to qualify for, though many tax resolution companies often promise them to get you in the door.
- Most tax debt, almost 90%, is settled with a payment plan. You typically have up to 5-6 years to pay though interest and penalties still accrue. Future refunds are intercepted to pay off the debt. We usually recommend committing to the lowest payment acceptable just to help keep you out of a jam. You can always make higher payments whenever it is convenient.
- If your financial situation is such that you can’t meet the minimum payments for an installment plan, meant to pay off your debt in 5-6 years, you can get a reduced payment plan. This requires an IRS review of your financials. Any debt that is assessed and not paid off in 10 years is forgiven so they will try and avoid a reduced plan, but this is still an option available to you if you qualify. Your financials can be reviewed periodically to ensure that you still qualify for this arrangement. Interest and penalties will still accumulate and any refunds in future years you may qualify for will be intercepted.
- If your financial situation is extremely dire, and can be proven with an IRS review of your financials, you can be placed in temporarily uncollectible status. This gives you time to regain your footing without threat of lien, levy or garnishment. Interest and penalties still accumulate and you can setup a payment plan or file for an offer in compromise in some future year.
- Lastly, you can prove you don’t owe the debt.
What do all of these plans have in common? 2 things”
- Once any of these plans are established, you will be removed from collections status and the IRS will leave you alone, as long as you meet any agreements you signed.
- Before the IRS will discuss any of these methods, all past due tax returns have to be filed.
So, the first thing you should always due is to have the unfiled returns prepared. Then and only then will your options become clear.
If you have unfiled returns, look to AFS for quick service at very competitive pricing. We can also advise you of your options, help you file for a financial review and interact with the IRS in your stead if you desire. You can even get a quote for return preparation on our website, www.afsnodebt.com.
Have tax needs? Use AFS- we’re the best.