5 ways to fix your unfiled tax returns

Millions of Americans gather their documents, sit down in front of their computers and file their tax returns by the April 15 deadline each year. However, millions of others find themselves overwhelmed or mistakenly don't think they owe anything and, in turn, choose to let the tax deadline fall through the cracks instead. But whether it's one year or several, an issue with unfiled tax returns can lead to penalties, interest and even legal trouble with the Internal Revenue Service (IRS), and these issues only grow with time. 

The IRS doesn't just ignore an issue with unfiled tax returns — and unlike delinquent tax payments, there's no statute of limitations regarding unfiled tax returns, either. The longer you wait, the more complicated (and costly) your situation becomes as the interest and penalties continue to accumulate. And, if you wait too long, the IRS may eventually create substitute returns on your behalf, which will rarely work in your favor.

But the good news is that you have multiple options to get back on track. The IRS typically looks more favorably upon taxpayers who come forward voluntarily, so if you've missed one or more years of filing your taxes, it helps to know how to fix the issue.

Chat with a tax relief expert about your unfiled tax returns now.

5 ways to fix your unfiled tax returns

Whether you're behind by a year or a decade, here are the ways you can fix your unfiled tax returns:

Voluntary disclosure through the IRS compliance programs

The IRS offers a Voluntary Disclosure Program that allows taxpayers to come clean about unfiled returns before the IRS contacts them. This program doesn't eliminate penalties in full, but it significantly reduces the risk of criminal prosecution and often results in more favorable settlement terms. The process involves submitting a preclearance request, followed by a formal voluntary disclosure and then working with the IRS to resolve all outstanding issues.

For taxpayers with foreign assets or income that hasn't been reported, the streamlined filing compliance procedures offer a specialized pathway with potentially reduced penalties. This program is designed specifically for taxpayers who can certify that their previous failures to report were non-willful.

Learn how working with a tax relief company could benefit you.

File through the IRS Fresh Start program

The Fresh Start Program isn't a single program but a collection of initiatives designed to help taxpayers address their tax debts. For those with unfiled returns, the program offers more accessible installment agreements and potentially more favorable terms for Offers in Compromise (OIC).

Under Fresh Start provisions, you may qualify for an installment agreement with simplified documentation requirements if you owe less than $50,000. The program also expanded the OIC program, making it easier to qualify by revising how the IRS calculates a taxpayer's reasonable collection potential.

Request an installment agreement

Once you've filed your past-due returns and know how much you owe, an installment agreement allows you to pay your tax debt over time. The IRS offers several options, including:

• Short-term payment plans (120 days or less) with no setup fee
• Long-term payment plans with various setup fee options depending on your income level and payment method
• Streamlined installment agreements for those who owe less than $50,000

Submit an Offer in Compromise

If your financial situation makes it unlikely you'll ever be able to pay your full tax debt, an Offer in Compromise allows you to settle your tax debt for less than the full amount. This option is not easily obtained, but when successful, it can provide substantial relief.

The IRS evaluates your ability to pay based on your income, expenses, asset equity and future earning potential. If you take this route, be prepared to provide extensive documentation of your financial situation, including bank statements, pay stubs, investment accounts and a detailed listing of your monthly living expenses.

Request Currently Not Collectible status

If you're experiencing significant financial hardship after filing your back taxes, you can request that the IRS place your account in Currently Not Collectible (CNC) status. This doesn't forgive your back tax debt, but it temporarily halts collection efforts while you're unable to pay.

To qualify, you'll need to demonstrate that paying your tax debt would prevent you from meeting basic living expenses. If approved, the IRS will periodically review your financial situation, and if the agency finds your circumstances have improved, they may resume collection efforts.

Can a tax relief service help me with my unfiled taxes?

A tax relief service can be a valuable resource if you have multiple unfiled returns or significant tax debt. These services typically assist with filing back taxes, negotiating with the IRS and finding the best resolution for your situation. They can also help determine if you qualify for programs like penalty abatement, an Offer in Compromise or an installment agreement.

However, not all tax relief companies are created equal, and it's important to be cautious of companies that promise unrealistic outcomes or charge large upfront fees without a clear resolution plan. Working with a trusted tax professional or a well-reviewed tax relief service, on the other hand, can help you navigate the complexities of fixing unfiled tax returns.

The bottom line

Ignoring unfiled tax returns won't make them go away, and the consequences can grow over time. Fortunately, the IRS offers several programs to help taxpayers get back on track without unnecessary penalties. But whether you choose to file voluntarily or work with a tax professional to resolve the issue, it's important to act now. The sooner you take steps to fix your unfiled tax returns, the better your chances of reducing penalties and avoiding IRS enforcement actions.