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A Three-Step Plan for Catching up Unfiled Taxes

We have all fallen out of someone’s good graces. Remember that time you forgot your mother’s birthday? Whoops. Or that time you ignored your taxes? I mean, really, how can the IRS expect you to calculate payments, keep up with expenses and filter through their complex tax forms?

However, the IRS estimates that it loses approximately $27 billion a year to non-filing—many of which are small businesses ( It’s not that business owners like you don’t want to correct tax issues; it’s more a matter of simply not knowing where to start to bring unfiled taxes up to date.

If you forgot your mother’s birthday or are behind on your taxes, then fear not. First, there are these special stores that sell greeting cards. Go there and buy your mom a card. Second, there is a sound three-step plan you can follow to get back into the IRS’ good graces. You can get back in compliance, reduce your penalties, and arrange a payment plan. It is possible, even welcome, to work with the IRS personally to bring taxes current. You can also work with an experienced CPA firm to help navigate the process and alleviate the stress that comes with dealing with your buddy and best pal the Internal Revenue Service.

Your Three-Step Plan
You blew it that time you forgot your mom’s birthday. Yet, rather than wait for her to call and lay on the guilt trip, it was best to be proactive and acknowledge your mistake. It’s the same with the IRS. Indeed, your effort to make good with your unfiled taxes will go a long way. It’s not as though the IRS will throw you in jail. Well, maybe. But the likelihood of going to jail is exceptionally slim—especially if you diligently work with the IRS to correct the issue.

So, how to get back into the IRS’ good graces? Follow these three steps.

Step 1: Get all back tax returns filed
This includes current year and typically as far back as the previous six years. Prepare by taking a deep breath and chugging a vat of coffee. Then, collect and organize all your available records, including 1099’s, receipts, invoices, and other relevant documentation. The more documentation you can present, the smoother the process for catching up on unfiled tax returns. The IRS can help here. At your request (can you say, “Pretty please”?) they can provide information statements filed under your identification number (i.e. social security number) for these years. This is called a Wage and Income transcript.

Step 2: Be compliant with current year payments
Next, you will want to catch up on your current year estimated tax payments as quickly as possible. Catching up shows the agency that you are a swell person and that non-compliance will not be a factor moving forward, something they want to see.

Once you are in full compliance (a.k.a. on good speaking terms), you will be in a better position to address penalties and arrange to pay past balances owed—which is Step 3.

Step 3: Work to reduce penalties and arrange a payment plan
At this stage, you will want to address late filing and payment penalties if you can establish a good reason for your lapse in compliance. No, “I forgot” or “my dog ate my taxes” aren’t good enough reasons. This process is called penalty abatement. In order to obtain abatement, you must make a sound argument for reducing penalties.

Another option is often overlooked: a first-time penalty abatement waiver. This waiver allows first-year failure to file and pay penalties to be waived or abated if you have a past history of compliant behavior. It is a one-time penalty amnesty. If you have multiple years of penalties, then you are a very bad person. Kidding. Pick your chin up and know that you can use first time abatement for the first year and reasonable cause for the other years if applicable. Reasonable cause exists when the taxpayer demonstrates that he or she exercised ordinary business care and prudence in determining the tax obligation, but nevertheless failed to comply.

For detailed explanations on these and other arguments for penalty abatement, seek the advice of an accounting professional (and not that friend on Facebook).

Finally, while you are seeking relief from penalties, you will want to secure a payment arrangement with the IRS. If you are not able to pay, you can make other arrangements based on your documented ability to pay. The agency will work with taxpayers to finalize these arrangements. Really, they will.

Final Words…
If you are two or more years behind on filing your taxes, what were you thinking? No, seriously, life happens, but it’s best to step up and take care of the issue sooner rather than later. The IRS will work with taxpayers to help resolve the issue. Voluntary compliance is recommended, as it will make your interaction with the IRS positive and effective. Well, as positive and effective as dealing with your taxes can be! Avoidance is not an option. Indeed, the IRS, like your mother, has a long memory and it’s highly unlikely unpaid taxes will slip under the radar.

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Jonathan Medows, CPA

Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.

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