Generally speaking, it is never too late to file a tax return. Even after seven years, you can still file your tax return to the IRS. However, except in a few specific cases, you cannot obtain your tax refund after seven years, as the statue of limitations will have expired. In addition, you will likely be assessed a penalty for a filing seven years late.
Unless you make specific arrangements to obtain an extension, your tax return for a calendar year is due on the 15th of April of the following year. If you simply ignore this deadline, you may be assessed a late filing penalty, also referred to as "failure to file penalty." Furthermore, you will be asked to pay interest on taxes you owe from prior years, whose returns were not filed on time. According to the IRS, these charges may increase your total tax bill by 25 percent or more. Finally, failing to file taxes for a particular years also inhibits accurate filing in subsequent years. You will have to estimate tax loss carryforwards and are far more likely to make mistakes.
The IRS cannot pay refunds to filers if the statue of limitations has expired. According to section 6511(a) of the Tax Code, you can only claim a refund within three years of filing a timely tax income return or two years after you have overpaid taxes, whichever is later. If you have failed to file a return, the "two year after overpayment" rule applies. Therefore, except during specific cases, you cannot receive a tax refund from the IRS for overpayment that occured seven years ago. Also keep in mind that you will not be paid accrued taxes on late refunds.
The tax law makes two exceptions for claiming a tax refund from seven years ago. The first is tax refunds that arise from bad debt, as per section 6511(d)(1) of the Tax Code. So if a loan you have made has still not been repaid and has a slim to no chance of being returned to you, you can declare that loan a loss on a tax filing from as far back as seven years ago and claim a refund. Secondly, under section 165(g), securities that have lost their entire value can likewise be grounds for amending a previously filed return for up to seven years and claiming a refund. These sections of the tax code are relatively complicated, and you should consult a tax attorney if these exceptional situations apply to you.
What To Do
If you are substantially late for filing a tax return, it is best to work with a qualified accountant who can review your late filing as well make any changes to returns from later years, which may contain mistakes due to your incomplete return history. Also, if you have a legitimate reason for failing to file, preserve all evidence. Attach an explanation to your tax return, stating why you were late and be prepared for penalties.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.