Six-Year Compliance Rule for Unfiled Tax Returns

If you have several years of unfiled tax returns, you generally will not be able to set up payments or apply for settlements until you get back into compliance. Typically, this means that you must file the last six years of returns. But there are exceptions to the six-year compliance rule.

Getting back into compliance helps you minimize penalties and interest and avoid liens, levies, and other collection actions. To determine how many years of returns you need to file, contact us at The W Tax Group today, or continue reading for an overview of what this rule means and how it applies to taxpayers who’ve fallen behind on their filing requirements.

Key Takeaways 

• The six-year compliance rule – IRS policy that taxpayers are usually considered compliant as long as they’ve filed the last six years’ worth of tax returns.
• Exceptions to the rule – Filing more than six years of returns may be required if there’s significant tax debt, unfiled business tax returns, or a revenue officer has been assigned to the case.
• Benefits of compliance – Eligibility to apply to payment plans or settlements, reduced chances of criminal prosecution, and minimized collection actions. 

What Is the 6-Year Compliance Rule? 

The six-year compliance rule applies to taxpayers with several years of unfiled returns. It states that taxpayers generally should file the last six years of returns to get back into compliance, but it also lists elements the IRS should consider when determining exceptions to the rule.

This general rule is stated in IRS Policy Statement 5-133, Delinquent Returns – Enforcement of Filing Requirements, and it notes that you may need to file six years or more or less than that number. The specific facts and circumstances of your case, as well as the discretion and judgment of IRS management, will determine how many years of back taxes you need to file.

Here are some facts and circumstances that can affect how many years of tax returns you need to file:

• Your overall history of tax compliance.
• Whether some of your income is illegal.
• The amount of money the IRS can expect to recover from you in relation to the resources the IRS will need to spend to recover those back taxes.
• What effect, if any, asking for additional (or fewer) tax returns will have on your future tax compliance.
• Any other special circumstances.

For the most part, as long as you don’t owe a large amount in back taxes and the IRS doesn’t suspect tax evasion, you will be required to file no more than six prior tax years’ worth of back tax returns.

Do I need to file more than six years of returns? 

There are three reasons why the IRS might ask for you to file more years of tax returns. First, the IRS thinks you have a large tax debt. Second, your unfiled tax returns are business returns. Third, there is a revenue officer assigned to your case. If any of these apply to your situation, there’s a possibility you’ll need to go back further than six years. 

Why the Six-Year Rule for Compliance Is Important 

Being compliant with the IRS offers several benefits. One of the biggest is reducing the chance of being criminally prosecuted for willfully failing to file one or more federal tax returns. Title 26 USC § 7203 imposes criminal liability on taxpayers who intentionally choose not to file a required tax return. This can constitute criminal tax evasion and result in prison time and fines.

Another important reason to be compliant with the IRS is that reduces the likelihood the IRS takes collection actions against you, such as a lien levy. If you file a missing return and it indicates you don’t owe taxes for a particular tax year, then the IRS no longer has a reason to use a lien or levy to collect a tax you don’t owe.

Then there’s the fact that you must be compliant with the IRS to be eligible for certain tax benefits or privileges. If you want to submit an offer in compromise (OIC), you must have filed all required past tax returns. If you want to apply for a long-term payment plan (installment agreement) online, you have to have filed all required tax returns.

Benefits of filing back taxes 

In situations where you don’t care about IRS compliance, other benefits come with sending in unfiled tax returns.

First, you can reduce your failure to file penalty. This penalty is 5% of the balance due per month, and it can get up to 25% of your balance. Once you file, you can request the IRS to waive this penalty.

Second, if you’re owed a tax refund, the IRS isn’t required to send you your refund unless you first file the relevant tax return. Additionally, if you file for one year that shows a refund but you didn’t file for previous years, the IRS may hold your refund on the premise that you may owe tax for the years you didn’t file. 

Third, filing a tax return starts the applicable statutes of limitation. For example, the IRS usually has 10 years from the date a tax has been assessed to collect a tax from you. This is the Collection Statute Expiration Date, or CSED. If that deadline passes, the IRS is legally prohibited from trying to collect that tax. 

On top of that, the IRS generally has three years from the date it receives an original tax return or three years from a return’s due date (whichever is later) to assess a tax. This is the Assessment Statute Expiration Date, or ASED. If the IRS never gets a tax return from you, neither the CSED nor the ASED deadlines will apply. In case you’re wondering, the IRS preparing and filing a tax return for you with a Substitute for Return doesn’t start the ASED clock. 

How to Catch Up on Unfiled Tax Returns 

The simplest, although not always the easiest, thing to do is file the missing tax returns. Before you do though, you should contact the IRS to confirm which years the IRS considers unfiled. After you identify and confirm which returns you must file, gather the necessary financial documents and records needed to file those returns. This may be the most challenging part, as you might need statements or papers that you no longer have or never received.

Not having the necessary documents will increase the difficulty in becoming compliant with the IRS. That being said, there are things you can do to obtain the missing information.

How to find missing income documents for old tax returns 

Assuming you know which documents you’re missing, see if you can reach out to the organization or entity that produced the missing documents. For example, if you’re missing bank statements or investment records, contact the bank or investment firm and see if you can get another copy. 

If you’re missing income statements, like a W-2 or 1099, contact your employer (or their payroll provider) and ask for another copy. Alternatively, you can ask the IRS for a copy of your tax transcript – you can access the last 10 years of wage documents through your IRS online account. If an organization sends an income statement concerning you to the IRS, it should be listed on this transcript.

For other records you don’t have, you may need to recreate them (or create them for the first time). For instance, if you’re a business that never received invoices from suppliers, you might need to go through old bank records or credit card statements to identify purchases from those suppliers. 

Contact the W Tax Group for Help With Unfiled Tax Returns 

Becoming compliant with the IRS may be easier said than done. There’s not only the challenge of obtaining the information needed to file the missing returns, but you’ll also need to confirm you were legally required to file those returns in the first place. Assuming you get all that done, then it’s time to start the process of preparing and filing the returns.

This can be a daunting task, but the W Tax Group can help. Our tax professionals have experience handling these types of situations and will be more than happy to help you file these returns and assist you in determining IRS program eligibility and benefits and avoiding IRS collection and enforcement actions. To learn more, use our online contact form to schedule a free consultation – whether you haven’t filed for three years or even 10 years, we can help you.

Lead Tax Attorney at The W Tax Group

Stephen A Weisberg