Not Filing Your Taxes Won’t Make Your Debt Disappear. It Just Makes it More Expensive

A new client says that they haven't filed in a couple of years.

Or they hand you a stack of IRS notices about unfired returns they've been stuffing in a drawer.

Or they casually mention the IRS 'sent some letters' but they haven't looked at them, and, btw, they haven't filed in 8 years.

Here's what most of your clients don't understand: just because they haven't filed doesn't mean they don't owe or that penalties and interest aren't accruing.

Or that they're safe from collections.

As a tax professional or a bankruptcy attorney, you're often the first person they mention this to. Which means you're often the first person who can stop the bleeding.

Client's don't understand un-filed tax returns.

Here's 4 things every professional needs to know.

1. The IRS Will File a Tax Return for Them. And It Won't Be Pretty

If your client sits on un-filed returns long enough, the IRS stops waiting around and files a tax return on their behalf They file what's called a Substitute for Return also known as an SFR.

Sounds helpful. It's not.

The IRS will uses whatever income information they have — W-2s, 1099s — and they give your client the standard deduction, zero dependents, and no credits. No business expenses. No deductions for anything. Just the worst possible version of your client's tax picture.

And once that SFR is assessed, the IRS starts collecting. Liens. Levies. Wage garnishments. Bank account seizures.

Your client thinks they've been avoiding the problem. Instead, they owe more than they ever would have if they had just filed it themselves.

2. The Penalty Math Is Brutal, And Most People Have No Idea

The failure-to-file penalty is 5% of the unpaid balance per month. It caps at 25% of the total liability. Which means that within 5 months of the tax being assessed

25% of the total tax owed! Just for not filing. And that doesn't include failure to pay penalties (another 25% increase), in addition to interest, compounding daily.

The client who owed $40,000 and waited a year may now owe $50,000 or more based on failure to file penalties alone. This is the "Paralysis Tax." The most expensive thing they did was choosing to wait.

Their taxes are not going away just because they put these notices in a drawer. They can save a lot of money by filing instead of waiting.

3. The Six-Year Rule Offers Real Savings...Most of the Time.

The IRS generally only requires that you file the last six years of compliance to get back into good standing. That's it.

Not a decade. Not every return they've ever missed.

For someone who's been out of compliance for a long time without the IRS filing a Substitute for Return, this is significant. Savings can be big.

But the six-year rule is a only a guideline

If a Revenue Officer is assigned to the case, he or she has discretion. If they believe the taxpayer was intentionally evading taxes, or the amounts owed are significant enough, they can require the taxpayer file more years.

For those who can take advantage though, understanding the six-year window is big. If they don't, and they file returns for the last ten years, they still owe for all ten, even if they were only required to file six.

4. The Statute of Limitations Clock on Taxes Owed Doesn't Start Until the Tax is Assessed

This one catches people off guard all of the time.

Clients come to me after not filing a return from six years ago and are shocked when they find out the statute of limitations on the tax due is still another ten years away once they file.

Once a tax return is filed, the IRS generally has three years to audit it and assess additional tax. Plus, the IRS can only collect the tax due for ten years.

But if your client doesn't file, that three-year clock or the ten year clock never starts. It only starts once the tax is assessed whether from a substitute return filed by the IRS or by the client themselves.

When you don't file, the balance owed isn't a debt that eventually disappears (although the six year rule kindof makes it so it does). It waits until the IRS files a substitute return or you file one yourself. They're not getting away with anything.

TL;DR

⏩ The IRS will file a Substitute for Return if your client doesn't — and it will assess the maximum possible tax, ignoring every deduction they're entitled to.

⏩ Failure-to-file penalties hit 5% per month and cap at 25% of the balance. Compounding interest stacks on top. The client who waits is paying a penalty for waiting. That penalty is huge.

⏩ The IRS typically requires only the last six years to get back into compliance — but not always, so you need to be aware.

⏩ The statute of limitations on assessment never starts until the return is filed.

➥ Contact Attorney Stephen A. Weisberg for a free Tax Debt Analysis.

Contact Me Here: https://www.weisberg.tax/contact-1

Email: s.weisberg@weisberg.tax

Phone/Text: (248) 971-0885

Address: 300 Galleria Officentre, Suite 402, Southfield, MI 48034