Understanding the intricacies of tax filing can be a daunting task, especially when it comes to filing past due tax returns. This comprehensive guide aims to provide you with a detailed understanding of how far back you can file taxes, the implications of not filing, and the best practices to follow when filing your returns.
Understanding the Time Limit for Filing Past Due Tax Returns
Contrary to popular belief, there is no time limit for filing past due tax returns. However, if you want to claim a refund, you must file your return within three years from the due date of the return. If you file your return more than three years late, you risk losing your refund. The IRS only issues refunds for the three most recent tax years. This is because the IRS has a statute of limitations that prevents it from collecting taxes after a certain period of time has passed. This period is generally three years from the date the return was due or filed, or two years from the time the tax was paid, whichever is later. However, there are exceptions to this rule. For instance, if you have failed to report income that you should have reported, and it is more than 25% of the gross income shown on your return, you should keep your records for six years.
Implications of Not Filing Taxes for Over a Decade
If you haven’t filed taxes in 10 years or more, you might be wondering if you’re in trouble. The IRS can indeed penalize you for not filing. The penalty for filing late is usually 5% of the unpaid taxes for each month or part of a month that a tax return is late. However, if you owe taxes and fail to file, the IRS can pursue you for the unpaid taxes, regardless of how long it’s been since the return’s due date.
In fact, if you have not filed your taxes for over a decade, you may still be liable for any back taxes. The IRS may file a Substitution for Return (SFR) on your behalf, which you are liable for. When an SFR is filed, it may leave off some deductions or exemptions that belong to you, resulting in a higher tax bill. However, you don’t need to accept the outcome. You can go back and refile those tax years, including any deductions or exemptions, decreasing the tax owed, and reducing interest and penalties.
Moreover, failing to pay tax could also be a crime. Under the Internal Revenue Code § 7201, an attempt to evade taxes can be punished by up to 5 years in prison and up to $250,000 in fines. But it’s important to note this is the worst-case scenario. The more likely outcome would be the IRS charges you with a failure to file and failure to pay, which carries a penalty of 5% based on the time from the deadline of your tax return to the date you filed it for every month the tax return is late, up to a total maximum penalty of 25%.
How Long Should You Keep Tax Records?
It’s advisable to keep your tax records for at least three years from the date you filed your original return or two years from the date you paid the tax, whichever is later. If you file a claim for credit or refund after you file your return, keep records for three years from the date you filed the original return or two years from the date you paid the tax, whichever is later.
The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction or credit shown on your tax return until the period of limitations for that tax return runs out.
If you received property in a nontaxable exchange, your basis in that property is the same as the basis of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property.
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. For example, your insurance company or creditors may require you to keep them longer than the IRS does.
Statute of Limitations for IRS Collections
The IRS typically goes back six years to collect on unfiled taxes. However, if the IRS suspects you committed fraud or there is a substantial error on your return, they can go back further. It’s important to note that there is no statute of limitations on unfiled taxes.
Filing Returns for Back Taxes
If you have unfiled tax returns, it’s crucial to take action as soon as possible. The first step is to gather all necessary documents, such as W-2s, 1099s, and any other income-related documents for the years you need to file. If you’re missing any documents, you can request a transcript from the IRS. Once you have all your documents, you can use a tax software program or hire a tax professional to help you file your back taxes.
Understanding how far back you can file taxes and the implications of not filing is crucial for maintaining good standing with the IRS and avoiding potential penalties. Whether you’re filing your taxes on time or dealing with back taxes, it’s always best to stay informed and seek professional help if needed.