Tax Law ✦ Unfiled Returns
Haven’t Filed in Years? There Is a Way Back, and It Is Better Than You Think.
Unfiled federal and California returns are the most common tax problem in the state and the most fixable. The IRS and the Franchise Tax Board have both probably already filed returns for you, and those returns are wrong in your favor’s opposite. North Star Law Firm prepares the missing years, files them in the right order, and negotiates the balances that result, in one engagement. Attorney-CPA. Flat fees. Statewide.
The Short Answer
File the returns. The balance usually drops, and the options open up.
If you have not filed, the IRS has likely prepared a substitute for return under I.R.C. § 6020(b) and the FTB has likely issued a Notice of Proposed Assessment from your W-2s, 1099s, and federal data. Both ignore your deductions, your dependents, your correct filing status, your basis in anything you sold, and your business expenses. Filing an accurate original return replaces those numbers, and the balance often falls by half or more. Filing also unlocks everything else: installment agreements, offers in compromise, penalty relief, and eventually a bankruptcy discharge all require filed returns. For most taxpayers, the IRS considers you compliant once the last six years are filed. The FTB has no such policy, and a missing California year can be assessed at any time (R&TC § 19087), so the California analysis is done year by year.
- Reconstruction of income and expenses from IRS wage-and-income transcripts, bank records, and 1099-Ks
- Preparation and filing of federal and California returns for every open year, in the right order
- Replacement of IRS substitute-for-return and FTB filing-enforcement assessments with accurate originals
- Demand penalty and late-filing penalty relief; first-time and one-time abatement where available
- Resolution of the resulting balances: installment agreements, offers, hardship
- Voluntary disclosure with the FTB for out-of-state businesses (R&TC § 19191) and with the IRS where facts warrant
What Happens If You Wait
What the agencies do when you do not file
Non-filing is not a passive state. Both agencies act on it, and each step makes the eventual fix more expensive.
| IRS | FTB | |
|---|---|---|
| Demand | CP59 / CP516 notices requesting the return | Demand for Tax Return; a 25% demand penalty if you do not respond (R&TC § 19133) |
| Assessment without a return | Substitute for return under I.R.C. § 6020(b), then a Notice of Deficiency | Notice of Proposed Assessment based on federal and third-party data; final in 60 days if not protested |
| Statute of limitations | None: an unfiled year can be assessed forever (I.R.C. § 6501(c)(3)) | None (R&TC § 19087) |
| Penalties | Failure to file up to 25%, failure to pay up to 25%, plus interest | Failure to file up to 25%, failure to pay up to 25%, demand penalty 25%, plus interest |
| Collection | Levies and liens on the assessed amount | Orders to Withhold, wage orders, liens, license suspension over $100,000 |
| Bankruptcy | Tax on a substitute return is never dischargeable until you file, and in the Ninth Circuit possibly not even then | Same rule applies to the FTB assessment |
| Refunds | Forfeited three years after the due date (I.R.C. § 6511) | Forfeited four years after the due date (R&TC § 19306) |
How are years of missing returns reconstructed?
We start with what the government already has: IRS wage-and-income transcripts show every W-2, 1099, 1098, and K-1 reported under your Social Security number for each year, and the FTB’s data is largely the same. Bank and brokerage statements fill in the rest: deposits, business expenses, cost basis for securities sold, mortgage interest. For self-employed taxpayers we rebuild a profit-and-loss from bank records and card processor reports, which is the same forensic accounting we do for audits. The returns that result are accurate and defensible, and they are what replaces the agencies’ estimates.
Order matters. Returns for years with substitute assessments go in first, because they reduce balances that are already in collection. Returns that show refunds go in before the refund statute runs. And where an old year shows a large balance that would be dischargeable in bankruptcy, we file it now to start the two-year clock rather than waiting.
What about the returns I filed that were not accurate?
That is a different conversation, and a privileged one. Amending a return to report income that was left off is often the right move, and the timing relative to any audit or collection activity matters. Where the omission was significant, the IRS and the FTB each have voluntary disclosure practices that can keep a civil problem from becoming a criminal one, but only if the disclosure comes before the agency finds it. As an attorney, Phillip Zagotti can evaluate that under attorney-client privilege; a tax preparer cannot.
The Attorney-CPA Difference
Six years of returns is a project. We have done it many times.
- Income reconstructed from transcripts and bank records to a defensible return
- Federal and California returns filed in the sequence that reduces balances fastest
- Substitute assessments replaced, demand penalties contested, refunds recovered before they expire
- The resulting balances resolved in the same engagement
Proof, In Print
He wrote the book on tax defense. Literally.
Phillip Zagotti co-authored Taxed: A Taxpayer’s Guide to Tax Defense and Resolution with Ashley Burdette. It includes a chapter on getting back into compliance after years of not filing, with the order of operations that keeps the process from making things worse. When you want it handled, the consultation is free.
Questions & Answers
Unfiled return questions we hear most
Will filing old returns trigger an audit?
Rarely. Late returns are processed like any others, and an accurate late return that reduces an existing substitute assessment is usually accepted as filed. What triggers scrutiny is a return that conflicts sharply with the third-party data, which is why we reconstruct from the transcripts first.
How many years do I really have to file?
For the IRS, the last six years generally satisfies the compliance requirement for a payment plan or an offer, unless the IRS has specifically requested earlier years. The FTB expects every year in which you had a filing requirement, and it will assess any year it finds.
I can’t pay what the returns will show. Should I still file?
Yes. Filing stops the failure-to-file penalty from growing, replaces inflated assessments, starts the clocks that matter for bankruptcy, and is the precondition for every payment arrangement. Owing and not filing is the worst of both worlds.
Can the FTB assess a year from a decade ago?
If no California return was filed for it, yes. There is no statute of limitations on assessment for an unfiled year, and the FTB’s filing enforcement program routinely reaches back when it finds a W-2 or 1099 with a California address.
The unfiled years are the easiest problem on this site to fix. Start.
A free compliance review with an attorney-CPA, and a flat fee in writing for the whole project.