Five on Fridays: "I have not filed my tax returns for several years. I don't know what to do...."
Today's Five on Fridays provides guidance to people who haven’t filed tax returns and/or paid taxes to the IRS for several years. These people are more common than you might expect. They could be your friends, your family members, and your neighbors. Their IRS situation often results in paralyzing fear, sleepless nights, and feelings of hopelessness.
The five steps below should help calm their fears and put them on a path toward tax resolution:
First Step: Breathe. You're not alone. Others have faced your situation, which may seem scary and impossible to overcome. With the right approach, you CAN pull yourself out of non-compliance and achieve peace of mind with the IRS.
Second Step: Contact a tax attorney to discuss your situation. While it may cost money on the front end to have your situation analyzed by an attorney, it’s imperative to have a strategy in place before approaching the IRS. I recommend contacting an attorney initially because your communications will be protected by the attorney-client privilege and they can advise you on possible criminal consequences for not filing your tax returns and/or paying your taxes. Once you grant power of attorney to a tax professional, they should be able to obtain and analyze transcripts from the IRS to see where you stand and develop a strategy to move forward.
Third Step: Get current with your tax filings. Even if you know you can't afford to pay what you owe to the IRS, the worst thing you can do is bury your head in the sand and continue not filing your tax returns. Not filing tax returns also extends the statute of limitations on collection indefinitely. As such, you should talk with a tax professional about the best approach to getting all of your tax returns filed ASAP.
Fourth Step: Once your tax returns are filed, you (and/or your representative) should explore the possibility of having any late filing and/or late payment penalties abated. The IRS will consider abating "failure-to-file" and "failure-to-pay" penalties based on "reasonable cause" and also offers a first-time abatement program for taxpayers with an otherwise clean compliance history.
Fifth Step: Analyze your ability to pay and seek a collection alternative with the IRS. If you cannot pay what you owe, you may qualify for an installment agreement, allowing you to pay what you owe over an extended period of time (typically 72 months). You may also qualify for an offer-in-compromise, allowing you to settle your tax debt for less than you owe. Finally, depending on your financial situation, the IRS may place you in a partial-pay installment agreement or non collectible status, meaning the IRS will not actively seek to collect from you, with the statute of limitations for collecting eventually expiring under both alternatives.
Disclaimer: Each person’s tax situation is unique and this is not intended to be a one-size-fits-all approach for every taxpayer. You should consult with a qualified tax professional about your individualized situation.