When the taxpayer has not filed taxes, The IRS figures liability based on information provided by third parties, without regard for any deductions, and may issue a Notice of Deficiency (IRS Letter 3219) also known as a 90 Day Letter.
Tax Tip – Many taxpayers are surprised to learn that the proposed IRS liability can be significantly reduced by actually filing rather than consenting to the collection assessment in the IRS 3219 /90 Day Letter .
Not filing your back tax returns can lead to a greater deficiency notice by having the IRS prepare a substitute tax return on your behalf, which can significantly overstate liability. In addition you may forfeit social security retirement benefits and other refunds due to you by not filing your back taxes.
Tax Tip – For taxpayers due a refund, the tax return must be filed within 3 years from the date the tax return was due to claim the refund. In contrast, the IRS has no limitations for collections on unfiled returns for back taxes.
In addition to interest charges, a failure to file penalty of a maximum of 25% of the net tax due (higher if the failure to file was fraudulent) and a failure to pay penalty may apply.
Tax Tip – Taxpayers can avoid penalties for not filing back tax returns where they can demonstrate reasonable cause (and not willful neglect) or a good faith belief that no return was due (for example, relying on the advice of third party preparer).