Unfiled Tax Returns? Answers to your most basic questions

calendar-thumb-375x250-49268I have written about unfiled tax returns quite a bit.  The reason?  Many Americans don’t file tax returns on time and a good percentage of those people have failed to file returns for several years or more.

If you haven’t filed in quite a while and have questions, this article will provide answers to most of them and help you to avoid searching our blog for each answer individually.

What is the Statute of Limitations on Unfiled Tax Returns?

If a tax return hasn’t been filed, there is no formal statute of limitations period.  In theory the IRS can continue to ask you for a return indefinitely.  But it doesn’t for two reasons:

a.       The IRS will usually do a tax return for you at some point, using the income information it has gather from your employer and other sources.

b.       If you haven’t done the return for several years and the IRS hasn’t done it for you…it may not be requested as a pre-requisite to dealing with your tax problem.  In other words, the IRS may only demand 7 years of returns to consider you to be “in compliance” or back in the system and it may simply ignore the older years.

If I haven’t filed a tax return for several years, do I need to file all of the missing returns?

If you haven’t filed for a long time, the IRS will typically tell you how many years you need to file in order to be considered “compliant” or back in the system.  That time period shouldn’t be more than 7 years.

If the un-filed return is older than 7 years and the IRS hasn’t done a substitute return, you may not need to file it.

If the IRS has done an old return for you, you may want to do your return if the correct return will reduce the debt substantially and if it makes sense to do so in relation to the IRS statute of limitations on collection.

What if I can’t pay the tax I owe on a missing tax return or several missing returns…should I file them?

Although rarely prosecuted as a crime by itself…failing to file a tax return is a crime and owing a tax debt isn’t.

If you are trying to settle a debt with the IRS or arrange a payment plan, it will demand certain missing returns are filed before it allows you to proceed.

I am going to file for Bankruptcy; do I need to file tax returns?

Certain returns have to be filed in order to obtain a discharge in your bankruptcy case generally.  Income tax returns should be filed as one element or requirement to discharging your obligation in bankruptcy on the debt.  Your bankruptcy Attorney should be able to help you determine which returns need to filed for purposes of the bankruptcy case.  An Attorney experienced in both tax and bankruptcy should be able to tell you which returns need to be filed in order to obtain a discharge of the tax debt obligation in the future.

If I have unfiled tax returns do I lose my passport?

It is possible.   You won’t be denied for owing tax debt though but the Government State Department does review and discuss with the IRS to see if your returns are missing.

Do I have to file to claim a Refund?

Yes.  The IRS isn’t going to issue a refund to you unless the return is filed.

Is there a time limit on filing a return that will cause me to lose my refund?

If you are due a refund, you only have a short period of time to claim it.  There are two different rules at play.

1.              Two Year Rule

If you paid the IRS money or the IRS took money from you for a debt related to a substitute return, and you file the return within two years and you don’t owe or owe less than the IRS received, you should get the money back.  If you wait for more than 2 years, the IRS keeps it, unless the Three Year Rule applies.

2.              The Three-Year Rule

If you haven’t filed a tax return and it has been 3 years since it was due, you will lose your refund.  You will lose it no matter how large the refund was.

So you have until the later of three years form the date of the original deadline to file the return or two years from the date the tax was paid to claim a refund of overpaid tax from the IRS.


Your 2012 tax return was due with an extension on October 15, 2013.  You will have until October 15, 2016 to file a return and get your tax refund.  If you file your return one-day after that three-year period expires, the refund is lost.

If you filed a return, you can claim any additional refunds by amending within three years from the original return due date.

What if I don’t have all of my information to create the missing return(s)?

You can retrieve and/or recreate information necessary to complete a return.  The old 1099 and w-2 information can be retrieved from the IRS.  Old property tax bills can be retrieved from the City you live in.  Profit and Loss statements can be created using old bank statements.  Mileage logs can be recreated using a calendar that you may have had for the year.

The law only requires you to file a return that is based on the “best of your knowledge” standard.  The return doesn’t have to be 100% accurate.

Is the IRS going to penalize me for failing to file a tax return on time?


The penalty is larger than the failure to pay penalty.  It is wise for that reason if you know you will owe to file the return on time.

Will my failure to file tax returns make the debt non-dischargeable in Bankruptcy?

One of the basic requirements to treat income tax debt as dischargeable in bankruptcy is that you file the tax return more than two years before you file the bankruptcy.  If the IRS files a substitute return for you first, the principal portion of the tax debt may never be dischargeable in bankruptcy.

Whenever we see a client who has several years of missing tax returns and we know that the debt related to those returns will be large, we suggest that the returns be filed quickly in order to beat the IRS to the punch and to preserve the ability to treat the debt as fully dischargeable in bankruptcy later on.







An IRS Lien release won’t remove the Tax Lien from your Credit Report…you must ask the IRS to Withdraw it

Antique_Mailbox-thumb-375x341-49286IRS Lien?

The IRS issues Notices of Federal Tax Lien (NFTL) with great regularity.  It’s own rules allow it to issue the NFTL if you owe more than $10,000.00.  There are a tremendous number of Americans who owe the IRS more than $10,000.00 and there are lots of NFTLs as a result.

I write and talk about the NFTL often, but there is a big issue that I think that many with people with tax lien problems miss and that is this:

If you have paid off a tax debt, discharged it in bankruptcy, settled it via an IRS Offer in Compromise, or if the IRS Statute of Limitations has wiped it out…the tax lien will be released.

When it’s released, it doesn’t exist for purposes of tying up a property etc.

But, the credit report will still show that the lien existed for several years, and will continue to damage your credit until the Fair Credit Reporting Act mandates it’s removal.

That’s not a happy thing.

The good news is that you can ask the IRS to “withdraw” the NFTL after the lien has been released and the withdrawal should remove the record from the Credit Report.

You can request the withdrawal in writing by using IRS Form 12277, Application for Withdrawal”.

In item 11, make sure and check the box that you believe that withdrawal is in the best interest of the taxpayer and the government.

You are basically making the argument that a person with a clean credit history has a higher chance of avoiding future tax problems than one with a bad credit history.  (Arguably untrue as well I suppose)

The general eligibility requirements to have the NFTL withdrawn are:

1.              It has been satisfied and released

2.              You have filed the last three years returns including all business and information return and:

3.              You are current on all estimated tax payments and tax deposits






Small Business Owner? Behind on Payroll Tax? You may be committing a Federal Crime.

bigstock-A-list-of-withholding-taxes-fr-7373728The Internal Revenue Code (IRC) at 26 U.S.C. Sect. 7202 makes the willful failure to collect, account for, and pay over employment tax a felonySee 26 U.S.C. Sec. 7202.

26 U.S.C. Sect 7215 makes it a misdemeanor for simply failing to pay the money collected.

Yes…it is a misdemeanor to collect FICA and Income Tax from your employee and not send it the IRS.

Fortunately the IRS doesn’t a make this crime a priority because it is under-staffed.

Yes…it is a felony to willfully fail to collect, account for or pay it to the IRS.

And yes…the IRS focuses it criminal effort on the felony cases and routinely charges small business owners with a crime under 26 U.S.C. Sect. 7202.  When it does, it also routinely gets convictions.

A few very recent examples:

In July, Michael and Laurie Russell of Hickman Nebraska were sentenced to 16 months and 6 months, and ordered to pay restitution to the IRS of more than $311,000.00.  They were convicted of “failing to pay that amount in tax and withholdings of their employees for 2006 when they owned North County Windows Inc. of Lincoln”.  See www.omaha.com/article/20130731/NEWS/130739695/1707

Last month, a man from Bear, Delaware was sentenced to 30 months after he plead guilty to keeping money withheld from his employees’ payroll taxes.  See www.delaware1059.com/story.php?id=4628

In October here in Arizona, the Lam Brothers plead guilty to charges that included evasion of payroll taxes.  See http://www.myfoxphoenix.com/story/23834491/2013/10/30/2-az-brothers-plead-guilty-to-tax-payroll-charges

If you are a small business owner and if you are having some payroll tax problems, you should be aware of a few things:

1.              The duty to collect and pay falls on the employer

The duty to collect the tax from the employee, account for it, and to make sure the IRS gets the money, falls on the employer.  It can’t be delegated away to someone else.  This doesn’t mean that you have to calculate the payroll and drop the check in the mail yourself…it just means that you need to make sure it is being done right.

2.              The duties to withhold, account for, and pay aren’t separable

The breach of any one of these duties is an offense under 7202; you don’t have to fail to do all three.

3.              The IRS doesn’t have to prove that an overt act was taken

7202 doesn’t require any proof that an affirmative or overt act was taken.  For example, the IRS doesn’t have to prove that you took the money and moved it into an offshore account for your retirement.

If you simply pay business creditors and the tax doesn’t get paid, the willfulness element of 7202 can be established, and the crime charged can move from a misdemeanor to a felony.

4.              A crime under 7202 or 7215 applies only to fiduciary tax but other crimes may be charged

These employee taxes are called “Fiduciary” taxes because you are simply the caretaker.  You aren’t the caretaker in the same sense when it comes to your (the employer’s) matching portion of the FICA tax.  However, failing to pay the employer’s portion can be charged as tax evasion under IRC Sect. 7201 or at a minimum, can be treated as relevant for sentencing purposes.

5.              There are some types of activities that increase the risk of a criminal charge

a.              Recidivism

If you have opened a number of businesses that have failed to account for, collect or pay this fiduciary tax, the IRS is looking more closely at you.

b.              Personal Benefit

A person who is making a good income while not making sure the tax is paid, is also a greater target.

c.              Toys

Fancy cars, boats, planes or other “Toys” will raise some eyebrows and increase the odds that you are charged with a crime.

d.              Claim Benefits on your personal Return

If the fiduciary tax didn’t make it the IRS, but you claimed that you paid the tax on your personal return, this is a big red flag.

6.              Penalties

The penalties for violating IRC Sect. 7202 pursuant to 18 USC Sect 3571 are:

a.              Fines up to $250,000.00 for individuals

b.              Incarceration up to 5 years

c.              The costs of prosecution

If you own a small business and are having a hard time paying all the business expenses, yourself and these fiduciary taxes, have a good CPA review your numbers immediately.  It may be better to let the business go, than to continue to ignore payroll tax problems.



Does the IRS have to leave me with a “livable wage” if it garnishes my paycheck?

bigstock-Keep-Your-Head-Above-Water-44126563No, the IRS doesn’t have to leave you a livable wage.

The IRS must only follow a table that determines how much money it must leave for you to live on each month.  See IRS Publication 1494.

The amount that it must leave is small, and there are just 4 factors that play into the determination:

  • Whether you are married
  • The number of exemptions you should claim
  • Whether you are older than 65
  • Whether you are blind

For example:

If you are married filing a joint return and you get paid on a monthly basis, and take 2 exemptions, the IRS will leave you 1666.67 to live on.

It won’t matter if you make $2000.00 per month or $20,000.00 per month, the IRS will leave you 1666.67 to live on each month until the debt is paid off or you do something else to deal with the debt like:

a.              Arrange a payment plan or non-collectible status situation based on another set of budget     figures.

b.              Propose an Offer in Compromise

c.              File a Bankruptcy

Obviously the IRS doesn’t use the IRS Publication 1494 to collect the debt.  It uses it to force you to do something about the debt.  If you have serious tax debt… and a levy has been threatened by the IRS, do something about it before your life becomes governed by Publication 1494.