Dealing with unfiled taxes can be daunting. The length of time the IRS can review your tax history, known as the statute of limitations, varies depending on several factors.
Understanding the statute of limitations
For most tax returns, the IRS has three years from the date you file to audit your return. This rule also applies to situations where taxes were underpaid due to errors or omissions. If you underreport your income by more than 25%, the IRS can extend the audit window to six years.
This scenario often arises if significant income is not declared. If you fail to file a tax return or if the IRS believes you committed fraud, there is no statute of limitations. As a result, the IRS can go back as far as necessary to assess taxes and penalties.
How unfiled taxes impact you
Unfiled taxes are treated differently than regularly filed returns. If you haven’t filed, the IRS can pursue tax assessments indefinitely. You could be liable for taxes, penalties, and interest for any year you didn’t file.
Additionally, the IRS may file a return on your behalf using the Substitute for Return process. While this might sound helpful, SFRs often don’t account for deductions or credits, potentially inflating your tax liability.
Penalty abatements
If you’re worried about penalties, you might qualify for penalty abatement. This means that under certain conditions, you could petition the IRS to remove some penalties. For instance, if you can prove you had a valid reason for not filing or paying on time, such as a serious illness or a natural disaster, the IRS may waive those penalties.
What you should keep in mind
Understanding the IRS’s timelines for unfiled taxes can help you better prepare and address any outstanding issues. It’s important to recognize the risks associated with unfiled taxes. Taking steps to resolve unfiled taxes and understanding potential abatements can ease the process and possibly reduce financial burdens.