Haven’t Filed Taxes in 3 Years? Consequences & How to Fix It
Marc Boulanger • March 4, 2025
If you haven't filed your taxes in three years, you're not alone. Life's complexities—be it financial hardships, overwhelming obligations, or simple oversight—can lead individuals and business owners to fall behind on tax filings. However, delaying this responsibility can result in escalating complications and costs. Understanding the repercussions and available remedies is crucial. As an Orange County CPA for back taxes we wanted to provide guidance on this stressing matter.
In this comprehensive guide, we'll explore:
- Consequences of Not Filing Taxes for Three Years
- IRS Notices Pertaining to Unfiled Taxes
- Implications for Businesses with Unfiled Taxes
- Substitute for Return (SFR): When the IRS Files on Your Behalf
- Filing Taxes When Missing Essential Documents
- The Importance of Filing Promptly, Even If You Can't Pay Immediately
By the end of this article, you'll be equipped with the knowledge to address unfiled tax returns and take proactive steps toward resolution and have a good understand of the answer when you ask yourself "what happens if I haven't filed taxes in three years?".
Neglecting to file taxes for an extended period doesn't go unnoticed by the IRS. They receive income reports such as W-2s and 1099s directly from employers, financial institutions, and other entities. Here's what you might encounter:
1. Accumulating Penalties and Interest
- Failure-to-File Penalty: Imposed at 5% per month on the unpaid taxes, up to a maximum of 25%.
- Failure-to-Pay Penalty: Charged at 0.5% per month on the unpaid taxes.
- Interest Charges: Accrue on both the unpaid taxes and penalties, compounding daily.
These charges can rapidly escalate, significantly increasing your total debt.
2. IRS Notices and Warnings
The IRS actively pursues unfiled tax returns through a series of notices:
- CP59 Notice: Indicates no record of your tax return for a specific year.
- CP515 or CP516 Notices: Reminders to file your tax return to avoid further action.
- CP518 Final Notice: Warns of impending enforcement actions due to continued non-compliance.
Ignoring these notices can lead to severe enforcement actions, including tax liens, wage garnishments, or levies on bank accounts.
3. Forfeiture of Tax Refunds
If you were entitled to a refund, you have a three-year window to claim it. After this period, the refund is forfeited, and the IRS retains the funds.
4. IRS Filing a Substitute for Return (SFR)
In the absence of your filed return, the IRS may prepare a Substitute for Return (SFR) on your behalf:
- Limited Considerations: The IRS bases the SFR solely on available income information, excluding deductions, exemptions, or credits you might be eligible for.
- Increased Tax Liability: This often results in a higher tax obligation than if you had filed personally.
An SFR is rarely in the taxpayer's favor and can complicate future filings.
IRS Notices Pertaining to Unfiled Taxes
The IRS employs a structured notification system to address unfiled taxes:
CP59 - No Tax Return on File
The initial notice indicating the IRS has not received your tax return for a specified year.
CP515/CP516 - Reminder to File
Subsequent notices urging you to file your overdue tax return to prevent further penalties.
CP518 - Final Notice Before IRS Action
A critical warning that enforcement actions are imminent if you do not comply promptly.
CP2566 - IRS Filed a Substitute for Return (SFR)
Notifies you that the IRS has filed an SFR on your behalf, which may not account for all eligible deductions and credits.
Timely response to these notices is essential to mitigate escalating consequences.
Implications for Businesses with Unfiled Taxes
Businesses face heightened risks when failing to file taxes:
1. Elevated Penalties
The IRS imposes more substantial penalties on businesses:
S-Corporations or Partnerships: A penalty of $220 per partner or shareholder per month, up to 12 months.
2. Potential Operational Disruptions
Non-compliance can lead to:
- Revocation of Business Status: The IRS may revoke your S-Corp or LLC status, affecting legal protections and tax benefits.
- Forced Business Closure: In extreme cases, the IRS can shut down operations until compliance is achieved.
3. Loss of Deductions and Credits
Without proper filings, you forfeit legitimate business deductions and credits, increasing taxable income and financial burden.
Substitute for Return (SFR): When the IRS Files on Your Behalf
An SFR is the IRS's method of filing a return for non-compliant taxpayers:
Why Is an SFR Disadvantageous?
- Exclusion of Deductions and Credits: The IRS utilizes standard deductions, overlooking specific deductions or credits you may qualify for.
- Higher Tax Liability: This often results in a greater tax obligation than if you had filed accurately.
- Limited Appeal Options: Challenging an SFR is more complex than submitting an original return.
It's imperative to file your own tax return to replace the SFR and ensure accurate tax assessment.
Filing Taxes When Missing Essential Documents
Missing documents shouldn't deter you from filing your taxes. Consider the following steps:
1. Request Wage and Income Transcripts
The IRS provides transcripts of W-2s, 1099s, and other income records. You can obtain these through your IRS online account
or by contacting the IRS directly.
2. Contact Employers and Financial Institutions
If you're missing W-2s or 1099s, reach out to previous employers, banks, or brokerage firms to obtain copies of your tax documents.
3. Use Bank Statements and Accounting Records
For business owners, freelancers, or self-employed individuals, bank statements and bookkeeping records can help reconstruct income and expenses.
4. File an Estimate If Necessary
If you cannot retrieve exact records, file a reasonable estimate based on past earnings and expenses. The IRS allows you to amend your return later if more accurate information becomes available.
Why You Should File Taxes as Soon as Possible (Even If You Can’t Pay)
Even if you’re unable to pay your tax liability in full, filing your return is always the best option. Here’s why:
1. Filing Stops the Failure-to-File Penalty
The failure-to-file penalty (5% per month) is significantly larger than the failure-to-pay penalty (0.5% per month). Filing prevents additional penalties from accumulating.
The IRS offers multiple payment options, including:
- Installment Agreements: Allows you to pay over time.
- Offer in Compromise (OIC): A potential settlement option where you may pay less than the total amount owed.
- Currently Not Collectible (CNC) Status: If you are facing financial hardship, the IRS may temporarily halt collection efforts.
3. Protect Yourself from IRS Enforcement Actions
Failing to file taxes can trigger severe collection actions, such as:
- Tax liens: The IRS places a legal claim on your assets.
- Wage garnishments: The IRS can take a portion of your paycheck.
- Bank levies: The IRS may seize funds directly from your bank account.
4. Preserve Your Eligibility for Refunds
If you qualify for a refund, you only have three years to claim it before the IRS keeps the money permanently.
5. Reduce Future Tax Complications
The longer you wait, the more complex the situation becomes. Filing your overdue returns now prevents unnecessary financial and legal headaches down the road.
Take Action Now—Call Our Orange County Office for Expert Help
If you haven’t filed your taxes in three years, don’t wait until the IRS takes action against you. At Boulanger CPA and Consulting, we provide Tax resolution services in Orange County and specialize in helping individuals and business owners resolve back taxes, minimize penalties, and get back into compliance with the IRS.
📞 So if you are wondering where to find the best tax relief services near me, call our Orange County office today at 657-218-5700
for a confidential consultation. Our experienced team will guide you through the filing process, negotiate with the IRS on your behalf, and explore all available tax relief options.
Frequently Asked Questions
What happens if I haven’t filed my taxes for three years?
If you haven’t filed for three years, you may face penalties, interest, and potential IRS enforcement actions like tax liens or wage garnishments. You may also lose any tax refunds owed to you for the earliest year.
Can I still get my tax refunds if I file late?
Yes, but only for the last three years. The IRS has a three-year deadline to claim refunds—after that, you forfeit them permanently. If you’re owed refunds from three years ago, file immediately to avoid losing your money.
Will the IRS come after me if I haven’t filed?
Possibly. If the IRS notices missing tax returns, they may send notices requesting the filings. If ignored, they can file a Substitute for Return (SFR) on your behalf, usually resulting in a higher tax bill because deductions and credits aren’t included.
What if I don’t have my tax documents from the last three years?
You can request an IRS wage and income transcript to retrieve W-2s, 1099s, and other reported income. Bank statements, financial records, and contacting past employers can also help reconstruct missing information.
Can I go to jail for not filing taxes?
Jail time is rare but possible in cases of tax fraud or willful evasion. The IRS is more focused on collecting unpaid taxes than prosecuting late filers. Filing now can prevent legal consequences.
How do I start filing after three years of missed returns?
Gather documents, request IRS transcripts if needed, and work with a tax professional to ensure accurate filing. Address any unpaid balances with IRS payment options.
What’s the best way to resolve my tax issue?
The best course of action is to file immediately to stop penalties and prevent IRS enforcement. Contacting a tax resolution expert can help you minimize tax liabilities and set up payment arrangements if needed.
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