Why and How to File Back Taxes

When people fall behind on their tax filing obligations, the IRS may eventually file a tax return on their behalf.

That might sound convenient, but it's rarely beneficial. Whenever possible, you're better off filing back taxes on your own (or with the help of a qualified tax professional). Below, we'll explain the benefits of getting caught up on your back taxes and how to file them.

Benefits of filing back taxes

Getting caught up on your tax filing obligations offers several advantages.

Claim a tax refund

If you haven't filed a tax return and the IRS owes you money, you have a limited number of years to claim your refund.

In most cases, you have three years from the tax return's original due date to file a return and claim a refund. If you miss that window, your refund becomes property of the U.S. Treasury.

Avoid a substitute for return (SFR)

If you haven't filed a tax return in years, the IRS can prepare an SFR on your behalf and send you an invoice for the tax it says is due. The problem is, while the IRS gets copies of 1099s and W-2s reporting your income, it doesn't have much information on your deductions. For example, suppose you deductible business expenses and paid for self-employed health insurance. The IRS doesn't have that information, so those deductions are left off entirely.

As a result, it's almost guaranteed that you'll owe more with an SFR than you would if you prepare your own tax return (or get help from a professional).

Avoid IRS collection actions

The IRS has collection powers that many other debt collectors don't have. If you don't file a tax return and pay the tax you owe, the IRS can garnish your wages, levy your bank account, place a tax lien on your home or other property, and even revoke your passport. However, there are steps the IRS must take before they can take any collection action against you. There is a Taxpayer Bill of Rights that outlines steps that must be taken before collection powers are taken by the IRS.” This way, it sounds less automatic that this will incur, as the IRS would have sent multiple notices to every taxpayer prior to starting any collection activity.

Typically, the IRS is willing to work with taxpayers who make an effort to get caught up on their tax filing obligations. So, filing back taxes may help you avoid more drastic collection efforts.

How to file back taxes

Even if you haven't filed or paid taxes in years, it's possible to get caught up. Here's how.

Step 1: Gather your documentation

If you have all your tax documents and just haven't filed yet, this step will be easy. However, if you lost your tax records or just haven't been diligent about keeping your records, this might take a little more work. Fortunately, you have options.

• Find the information online. These days, many banks, brokerages, and mortgage companies make tax documents available online. So if you're missing information on investment income or a mortgage interest statement, try logging into your online account to access a copy.
• Order a Wage and Income Transcript from the IRS. A Wage and Income Transcript includes all information reported to the IRS on your behalf, such as W-2s and 1099s. You can order a Wage and Income Transcript online via the IRS Get Transcript tool or by mail using Form 4506-T, Request for Transcript of Tax Return.
• Review bank and credit card statements for deductions. Your Wage and Income Transcript won't include things like charitable deductions or business expenses. Get copies of your bank account and credit card statements for the years in question and look for any deductible expenses.

You may not be able to recreate every tax record you're missing, but this should be a good start.

Step 2: Prepare and file your tax returns

Most online tax software programs allow you to file previous year returns, and your tax professional can file back tax returns as well. However, you may need to print out and physically mail your tax return to the IRS, because any return older than three years e-filing is not an option.

Step 3: Ask for a penalty waiver

There are generally two reasons the IRS might consider waiving your penalties:

1. Reasonable cause. The IRS might waive penalties if you didn't file tax returns because of extenuating circumstances, such as a natural disaster, illness, or death of an immediate family member.
2. First-time penalty abatement. The IRS may do you a one-time favor and remove your penalties if you normally file tax returns on time.

Call the IRS at 1-800-829-1040 to request penalty abatement or have your tax professional send a letter explaining the circumstances.

Step 4: Plan to pay the tax due

If you can afford to pay your back taxes, send a check with your tax return. Otherwise, the IRS will typically give you more time to pay. You can apply online for an IRS installment agreement.

If you need help filing back taxes, requesting penalty abatement, or navigating your payment options, work with a qualified tax professional. They can help you better understand your options and negotiate with the IRS on your behalf.