If you haven’t filed taxes in three years, you can lose the chance to claim a tax refund. Additionally, the Internal Revenue Service may file a tax return (called a substitute for return or SFR) on your behalf, and then, the agency will try to collect the tax bill.
Catching up on unfiled returns can seem daunting, but ignoring the situation can lead to serious trouble. To get help right away, contact us at the W Tax Group today. We can help you get caught up on filing taxes, and if you owe a tax liability, we’ll help you make arrangements with the IRS.
Want to learn more? Then, keep reading. This post takes an in-depth look at what happens if you don’t file taxes for three years.
What Happens If You Haven’t Done Taxes in 3 Years?
If you don’t file a tax return for three years, the consequences vary based on whether you need to pay taxes or are due a refund. Here’s what to expect:
The IRS Owes You a Tax Refund
The IRS gives you three years to claim a tax refund. The clock starts ticking on the return’s due date. For instance, if you were supposed to file a tax return by April 18, 2022, you have until April 18, 2025, to file a tax return and claim a refund. If you file after this deadline, you won’t be able to claim a tax refund.
You Owe Taxes to the IRS
If your tax return is going to result in a tax liability, you will incur failure-to-pay and failure-to-file penalties on your account. These start to accrue the day you miss the filing deadline. These penalties can get up to 25% of your unpaid tax liability, and interest accrues on your unpaid taxes until you pay them.
When you don’t file a tax return, the IRS can issue a substitute return on your behalf. If this shows that you owe a tax liability, the IRS can enforce collection actions against you.
Substitute Tax Return When You Haven’t Done Taxes in 3 Years
Failing to file your tax return can lead to the IRS issuing a Substitute for Return (SFR). An SFR is a tax return that the IRS generates using information received from third parties.
For instance, the IRS can generate a substitute tax return using W2 forms from employers, 1099-G forms that report unemployment or other government money, 1099-NEC forms from people who pay you as an independent contractor, and 1099-INT forms showing interest income from your bank.
Even if the IRS has the correct income information from you, substitute tax returns often show a much higher tax bill than you would incur if you had filed your own tax return. Here’s why:
- The IRS uses the standard deduction on SFRs. If you normally itemize, this will drive up your tax liability.
- The filing status on an SFR can only be single or married filing separately. If you usually use married filing jointly or head of household as your filing status, this will most likely increase your tax bill.
- SFRs don’t include dependents. This increases your tax liability because you don’t get the tax credits related to children or other dependents.
- Substitute returns don’t include business expenses. As a result, you end up facing tax on your gross business income, rather than on your net self-employment income.
If your SFR shows that you owed taxes for the years that you didn’t file a tax return, the agency will send you a notice about your unpaid tax assessment. If you agree with the tax bill, you can pay it in full or reach out to a tax professional to talk about setting up monthly payments or applying for other tax relief programs.
However, if you don’t agree with the SFR, you need to file your taxes for the years associated with the SFR. You must reach out to the IRS within 90 days of receiving the notice about the SFR. Otherwise, the tax assessment becomes final, and the IRS will start to collect the overdue taxes. The IRS may issue a federal tax lien, garnish your wages, levy the funds in your bank account, seize your assets, or take other actions to collect the back taxes.
How to Catch Up If I Haven’t Done My Taxes for 3 Years
To catch up on your unfiled returns, start by gathering the information you need to file a tax return. You need the following information from each unfiled tax year:
- Income documents.
- Information about unearned income such as investment income.
- Revenue and expenses from your business.
- Details on estimated tax payments.
- Receipts for medical bills, state and local taxes, charitable donations, and other deductions if you plan to itemize.
- Information about your dependents.
Depending on your situation, you may need additional tax documents to file, but your tax professional can let you know exactly what you need for each tax year based on your unique situation.
How to Get Missing Documents If I Haven’t Done My Taxes in 3 Years
You can contact payers directly to request old tax documents. For instance, if you don’t have a W2 wage statement, you can call your old employer and ask for one. However, it can often be hard to get information this way.
Alternatively, you can set up an online account on the IRS website and request a transcript of your payment information. Then, the IRS will send you the details from your old W2, 1099, 10998, and other forms. You can apply through the mail using Form 4506-T (Request for Transcript of Tax Return).
Why You Should File Taxes as Soon as Possible
When someone calls us and says, “I haven’t done taxes in 3 years,” we usually advise them to file their tax returns as soon as possible. Generally, the only exception is in cases where the taxpayer didn’t need to file a tax return. Here are the reasons that you should file your taxes as soon as you can.
To Claim Tax Refunds
If you haven’t filed for three years, you can still collect tax refunds on the last two years, and depending on the date, you may even be able to claim a tax refund on the return from three years ago. For instance, if you didn’t file for tax years 2020, 2021, and 2022, you have until April 15, 2024, to claim a refund on the first return that you missed.
To Reduce the Failure-to-File Penalty
The failure-to-file penalty is 5% of the tax debt owed from your return. It gets assessed on your account the first day that you are late, and the IRS assesses this penalty every month until you file. It can get up to 25% of your balance. The sooner you file, the sooner the IRS stops adding this penalty to your account.
To Reduce the Failure-to-Pay Penalty
The failure-to-pay penalty isn’t one of the IRS’s most significant penalties, but it is 0.5% of the unpaid taxes owed every month. Once you file and pay your taxes, you don’t have to worry about this penalty anymore.
To Avoid a Substitute for Return
You don’t want the IRS to file your taxes. It’s easier to file your returns proactively than to deal with an SFR. As explained above, SFRs are notorious for overstating your taxes owed, and once the IRS has used an SFR to assess tax, it can start collection actions against you.
To Avoid Enforced Collection Actions
If the SFR shows that you owe a tax debt from your unfiled federal taxes, the agency can start collection actions. This can include federal tax liens, garnishments, levies, and more.
To Get Into Compliance to Qualify for Certain Tax Resolution Programs
The IRS will only allow you to qualify for certain relief programs if you are compliant with tax filing obligations. For example, if you want to apply for an offer in compromise on federal income tax from a previous year, you need to be compliant with the filing requirements for the subsequent years. Then, you also need to file your taxes and pay on time for a certain number of years after you get approved for the program.
So You Can Apply for Loans
In some cases, you can get loans if you have unfiled tax returns, but in a lot of cases, lenders use tax returns to see your adjusted gross income. This is especially true if you are self-employed or applying for a mortgage. Once you file your old returns, you have proof of income that you can use when applying for loans.
The consequences can be even worse if you haven’t filed for 10 years or if you’re dealing with business taxes. For instance, you can incur a 100% trust fund recovery penalty if you haven’t been filing and paying payroll tax returns.
What If I Haven’t Filed Taxes in 3 Years and I Can’t Afford to Pay
A lot of people think that if they can’t afford to pay taxes, there is no reason to file a tax return. This is absolutely not true. Even if you owe tax that you can’t afford to pay, you should still file. This helps you to minimize failure-to-file penalties. If you pay taxes late, the penalty is much lower than the penalty for failing to file.
Also, once you’ve filed taxes, you can work with a tax professional to set up a payment plan or apply for other IRS tax resolution options. Here are the options for paying taxes once you’ve filed a return:
- Payment plan — This allows you to pay your taxes in monthly installments.
- Offer in compromise — If you qualify, the IRS will let you pay off your tax bill for less than you owe.
- Partial payment plan — You make monthly payments until the collection statute expiration date. Then, the IRS waives the remaining balance.
- Currently uncollectible status — The IRS stops collection actions on your account if you can prove that you can’t afford to pay your taxes without suffering economic hardship.
Depending on the situation, you may also qualify for penalty abatement, innocent spouse relief, or other programs.
Help! I Haven’t Filed My Taxes in 3 Years
If this describes your situation, you are not alone. Clients regularly contact us because they have three or more years of past-due tax returns. Often, the cycle starts because they miss the income tax filing deadline. Then, because they miss one year, they don’t file a tax return the following year, or the next year.
Don’t let this become a habit. The further you get behind, the harder it is to catch up on your past-due tax returns. Luckily, if you’ve only missed three tax returns, it will be relatively easy to catch up. You just need the right help, and that’s where we come in.
What If I Haven’t Filed State Taxes in 3 Years?
State revenue agencies all have their own rules and regulations for delinquent tax returns and unpaid taxes. However, in most states, if you file taxes late, you will incur a failure-to-file penalty based on the total unpaid taxes. In some states, you can even lose your professional license or have your business shut down.
What If I Haven’t Paid Taxes in Three Years
If you have filed tax returns but haven’t paid in three years, you have a lot of options, but you need to act quickly if you want to prevent the IRS from taking collection actions against you. When you contact a tax professional, they can talk with you about your tax debt and help you find the best resolution options for your situation.
Get Help With Unfiled Taxes
Worried about not filing your taxes for the last three years? Wondering about the consequences of not filing for other lengths of time? Want to get caught up and not sure where to start? Then, contact us today. We can help you resolve your tax problems.
Our tax attorneys can help you file your past-due tax returns. Then, we can help you work with the IRS or your state to create a plan to take care of your tax, penalty, and interest.
