With the IRS and unfiled back taxes, one good fact is that the IRS has an unwritten policy about not prosecuting people that voluntarily file back taxes. Things are different if the IRS finds you first though.  They can punish individuals up to 1 year in prison and $10k for every year unfiled. You probably won’t go to prison because the US doesn’t have enough prisons for all non-filers, but be assured that they will impose much harsher penalties if they find you before you voluntarily file your taxes. Understand why and how you can file your unpaid IRS taxes below. 

Why You Must File Back Taxes – Even if late

1. Penalties and Interest will grow significantly and increase the total tax amount you owe the IRS


2. If you do not file, the IRS may complete a "substitute tax return," which is not optimal as it is one tax return for all years. No federal exemptions or expenses will be applied therefore increasing your total tax liability.


3. If the tax is assessed and the IRS completes a substitute return for you, they will begin collecting. This means they can place a tax levy on wages or bank accounts, or a federal tax lien on your personal personal property.


4. The IRS will eventually find you. They have a complex computerized system that works slowly, but efficiently.


Even if the IRS has completed a substitute tax return for you it is in your best interests to file your back taxes because generally they will adjust your balance. Realize that you cannot receive a car loan or mortgage with unfiled tax returns. Social Security and other benefits can be removed as well. The consequences of filing voluntarily and not being able to pay are much less than if the IRS finds you first. Even if you file voluntarily and late and cannot pay, you may be able to negotiate a settlement with the IRS for less than the amount owed. Lastly, piece of mind that you no longer have to hide and will be considered in good standing with the IRS, even if you cannot pay the amount owed is a reason to file.

How to File Back Taxes

1. Gather Necessary Information : Find old documents needed to file old returns. Particularly old W-2 and 1099 tax documents. If you cannot find, you can ask your old company for the documents or contact the IRS by submitting Form 4506-T. If they do not have the information, you can call the IRS and request income data for missing years. It is likely that the IRS will have this information because all companies are required to report this information to the IRS. If they don’t have it, you can use form 4852, which is a substitute W-2 that estimates what your W-2 would have been for those given years.


2. Prepare the tax forms. You will need to use the specific year’s tax return form for each year you missed. You can find these tax forms on the IRS website or any tax preparer likely has them. You can also go into an IRS office and get them. Even with sufficient knowledge, due to the complexity of the code, it is best to have a tax professional prepare them if you expect to have a tax amount that you cannot pay when the return is filed.


3. Contact the Right Tax Firm: It is a good idea to use a tax professional that can file back taxes AND setup a resolution with the IRS. A total back taxes trusted firm will file your back taxes and help you find any settlement methods that are appropriate. If want to file them on your own, the easiest form of settlement is to send in a request for an installment agreement with the tax return. This will allow you to pay back the taxes owed in monthly installments. This form of agreement is the easiest to get accepted but there are many other IRS tax settlement methods.


4. File your back taxes and other paper work. If you received notice from the IRS to file the back taxes, send to the address listed on there, or send to the normal address you send your tax returns. Once you have your returns filed, you can next work with your tax professional to try to settle or reduce the total amount you owe. After that, you will need to come to an agreement with the IRS in regards to a payment plan or payment method.

Advice for Success

1. Don’t delay, the longer you wait, the worst penalties can get. It is NEVER too late to file a return.


2. Use a tax professional that can File AND Reduce your back taxes. You will likely end up saving more money by using a tax professional than if you attempted to do everything on your own since they are experts and have handled many situations similar to yours. This is especially important if you do not have enough money to pay the taxes owed. The IRS always tries to make individuals feel that they must pay at all costs when this is not the case at all and you can find a settlement method that is right for you.

Why a Tax Professional
A tax professional can file your back taxes and make sure you get the most out of your deductions and if you cannot pay the taxes owed (if any) they will find the best way for you to settle.

Paying Back Taxes Owed
There are several ways you can pay your back taxes to the IRS. Different payment options exist and you should pick the best one dependent upon your financial situation.

Ways to Settle Back Taxes
If you have taxes owed that you cannot pay after filing back taxes, you will need to settle these amounts with the IRS as soon as possible to prevent future penalties and interest from adding up

Consequences of IRS Catching Non-Filers
Having unfiled returns is far worst than filing the returns and not being able to pay. Will the IRS find you? What happens when they do.

Amend Incorrect Tax Returns
Reduce tax debt owed by amending old returns to claim exemptions that you may have missed. The IRS is very understanding to mistakesf, they happen to everyone.

Payment Plans Available for Unpaid Taxes
Depending upon your financial situation you may qualify for a payment plan if you cannot pay the tax amount in full.