People stop filing for ordinary reasons: a bad year, a lost record, a divorce, a business that fell apart. Then the second year is easier to skip than the first, and by the time a letter arrives there are five. The letter usually says the government has calculated the tax for you, and the number is far higher than anything you would have owed.
That number is almost never the real one. Catching up is less painful than most people expect, the balance usually comes down when the actual returns are filed, and the agencies treat a taxpayer who comes forward differently from one they have to chase.
This article follows the process in the order it progresses.
What Happens When You Do Not File
- The IRS files for you. Using the wage and income information it already has, the IRS prepares a substitute for return: single or married filing separately, standard deduction only, no dependents, no business expenses. It then assesses that tax, with penalties and interest, and begins collecting it.
- The FTB does the same. It sends a demand for the return and, if none arrives, issues a Notice of Proposed Assessment based on the income reported to it, adding a penalty for ignoring the demand.
- The clock never starts. The time limit on assessing tax runs from the filing of a return. For an unfiled year there is no limit.
- Refunds expire. A refund for an unfiled year is lost if the return is filed more than three years after its due date.
- Everything else stops. No payment plan, offer, or hardship hold is granted while required returns are missing.
The Picture
Finding out exactly which years are open and what income the agencies have on record.
We begin with the agencies’ own records rather than the taxpayer’s memory, through a process we call a compliance check. IRS transcripts show, for each year, whether a return was filed, whether a substitute return was assessed, every W-2, 1099, and other information return reported under your Social Security number, and the current balance. The FTB’s records show the same for California, including any notices that went to an old address.
Reading them answers the first questions: which years are actually unfiled, which years the government has already assessed, what income it expects to see, and whether any year carries a refund that is about to expire.
How Far Back
Deciding which years to file, which is a judgment rather than a rule.
The IRS’s stated policy is that filing the last six years generally brings a taxpayer into compliance, though it can require more where the amounts or the circumstances warrant. The FTB has no comparable policy and may ask for any year it has a record of. A year the government has already assessed must be filed regardless of age, because the actual return is the only way to replace the government’s figure.
We also look at the years from the other direction. A year with a refund is filed immediately if the three-year window is still open. A year with a small balance may be worth filing even if it is older than six years, because it closes the assessment period and removes a reason for future contact.
Reconstruction
Preparing accurate returns when the records are incomplete.
Income
Income is the easier half. The transcripts supply wages, interest, dividends, retirement distributions, and payments reported by customers and payment processors. Bank deposits fill in the rest for a self-employed taxpayer, and we reconcile the two so that the return matches what the government can see.
Expenses
Expenses take more work. Bank and credit card statements, which banks can reproduce for several years back, establish most business expenses. Mileage, home office, and cash expenses are reconstructed from calendars, contracts, and the pattern of the business, and documented in a memo kept with the return. A reasonable, well-supported reconstruction is accepted. A guess is not.
Prior returns
The last return actually filed is the template. It shows the deductions, dependents, and elections the taxpayer was using, and it keeps the catch-up returns consistent with the history.
Filing
Getting the returns on record and the government’s figures off it.
Where and how
Older returns are filed on paper, and where a substitute return has already been assessed, the actual return is sent to the unit that handles reconsideration of those assessments, with a cover letter asking that the government’s figure be replaced. The FTB return goes to the FTB with a response to any outstanding proposed assessment.
Order
When several years are involved we file them together, oldest first, because carryovers, prior-year credits, and estimated payments flow from one year to the next.
Processing
Paper returns and reconsideration requests take months to process, and collection on the assessed years does not stop automatically while they are pending. We ask for a collection hold during processing and follow up until each year shows the correct figure.
The Balance
Resolving what is left once the real numbers are in.
Penalties
Late filing and late payment penalties are assessed on the filed returns. First-time relief and reasonable cause, explained in our penalty abatement guide, are requested once the returns have posted.
Payment
What remains is resolved like any other tax balance: paid, placed on a payment plan, settled through an offer in compromise where the numbers support one, or placed on hold if nothing can be paid. All of those become available only now, because all of them require the returns to be filed first.
Staying current
The last step is making sure it does not happen again: withholding adjusted, estimated payments scheduled, and for a business, a bookkeeping routine that produces a return without a reconstruction.
Coming Forward Before the Letter
A taxpayer who files before the agency makes contact is treated as a late filer. A taxpayer who files only after years of ignored notices is treated as a problem account, and in rare cases of deliberate, long-term non-filing with substantial income, as something worse. The practical difference is large, and it is the reason to start the process now rather than after the next notice.
What It Costs
Catch-up returns are quoted per return, with the fee depending on the type of income and the state of the records. Reconstruction of business records is billed by the hour. Resolving the resulting balance is a separate engagement, quoted once the balance is known.
- Every notice from the IRS and the FTB, including any assessment for an unfiled year
- The last return you actually filed
- Any W-2s, 1099s, or other tax forms you have for the unfiled years
- Bank and credit card statements for those years, or online access so they can be downloaded
- For a business, whatever books, invoices, or point-of-sale records exist
Gregory Grigoryants is a California attorney (State Bar No. 286804) who has represented individuals, families, and business owners in bankruptcy, debt collection defense, and tax resolution matters for more than 13 years. He practices from offices in Sherman Oaks and Beverly Hills and speaks English and Russian.