In order to begin resolving your tax debt, the IRS requires that you file all required returns for the preceding 5 years. It’s also a good idea to do the same if you owe state taxes, so MD doesn’t do it for you…
If you want to get out from under the IRS and state of MD, before anything else, you must get all your required returns filed. Why? First, the IRS will only negotiate with you once you have filed all your returns. MD, on the other hand, is more than happy to set up a payment plan with you even if you don’t file your returns. They will just estimate your taxes and let you pay what they think you owe! Translation: It’s a good idea to file your MD tax returns as well.
Second, you may be entitled to a refund, and if you don’t file your taxes for three years, you will lose your right to collect this money! I have had many clients lose out because they did not file their returns in time, so don’t let this happen to you.
Third, the IRS may have filed a substitute for return (SFR) on your behalf, and assessed you much more than you really owe. When the IRS thinks you have income and doesn’t see that you have filed a return, they can prepare one for you. The thing is, the IRS doesn’t give you any deductions or credits, so you end up with a much larger tax bill. By filing your own returns, you may reduce or eliminate your tax debt.
Fourth, by filing the returns, you start the clock ticking to eliminate taxes in bankruptcy. Taxes more than three years old may be wiped out in bankruptcy, but ONLY if you have filed your returns. This may be the only way you can get out of MD tax debt.
Does it make sense to file federal tax returns that are more than 6 years old?
It may not. The IRS does not require you to file them and you might just be opening up a can of worms by doing so. According to the time limits (statutes of limitations) set out by federal law, the IRS can only bring criminal charges against you within six years of the date the tax return was due. For example, after April 15, 2016, you can’t be prosecuted for failing to file a 2009 tax return that was due on April 15, 2010.
There is no deadline, however, for the IRS going after you and imposing civil penalties – in addition to any taxes owed. So while you can’t be put in jail for not filing a 1988 tax return, you will forever owe the IRS a return, as long as you earned enough to have had an obligation to file. And the fines – which include penalties and interest – on unfiled tax returns run forever.
The good news is that the IRS doesn’t worry too much about that missed tax return after six years and it usually won’t pursue you for them. The IRS materials on Taxpayer Delinquency Investigations (Internal Revenue Manual 0021; IRS Policy Statement P-5-133) read as follows:
Taxpayers failing to file returns due will be requested to prepare and file (them). All delinquent returns … will be accepted. However, if indications of willfulness or fraud exist, the special procedures for handling such returns must be followed…. Factors taken into account include, but are not limited to: prior history of noncompliance, existence of income from illegal sources, effect upon voluntary compliance and anticipated revenue in relation to the time and effort required to determine tax due. Consideration will also be given to any special circumstances existing in the case of a particular taxpayer, class of taxpayer or industry.
Normally, application of the above criteria will result in enforcement of delinquency procedures for not more than six years. Enforcement beyond such period will not be undertaken without prior managerial approval.
The IRS can still request a tax return for a period of more than six years ago, but if you tell the IRS that you don’t have enough information to prepare a return, the agency will usually drop the request. However, if the IRS computer shows income information on you, such as a W-2 or 1099 form, the IRS may calculate and assess the tax anyway.
For more information on Getting A Fresh Start In Life, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (855) 4MD-BANK today.