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One important thing to consider that nobody's mentioned yet - if your cousin had clients who paid him more than $600 in any year, they might have filed 1099s reporting those payments to the IRS. That means the IRS already knows about some of his income, which is why getting ahead of this voluntarily is so important. Also tell him to look into Qualified Business Income deduction which became available in 2018 - it could reduce his taxable income by up to 20% for the self-employment income. That could make a huge difference across multiple years of back taxes.
That's a really good point about the 1099s. He mostly worked for cash but did have some corporate clients who probably reported payments. For the QBI deduction, would that apply even though he didn't file on time? It seems like a huge benefit to miss out on.
The QBI deduction absolutely applies even for late filed returns! The deduction is tied to the tax year, not when you file. Just make sure when you prepare the 2018-2024 returns that you calculate and claim this deduction - it's basically free money that reduces self-employment tax liability by allowing you to deduct up to 20% of qualified business income. As for the 1099 situation, this is actually why I suggested filing everything at once rather than staggering. The IRS computer system will match reported 1099 income with filed returns, and if you file incomplete years while leaving gaps, it can trigger automated notices for the missing years.
Speaking from experience, the biggest issue with back taxes is getting overwhelmed and doing nothing. I put off filing for 7 years and the anxiety was worse than the actual process of fixing it. Start with whatever year you have the most complete records for to build confidence. The hardest part is just starting. And honestly tax pros who specialize in back taxes aren't as expensive as you might think - I paid $1200 total for help with 7 years of unfiled returns and it was the best money I ever spent because they found deductions I never would have known about.
Did you have to pay all the back taxes at once? That's what scares me - I'm in a similar situation and worried I'll owe tens of thousands I don't have.
My audit for claiming my niece as a dependent took almost 9 months to resolve last year. The IRS is seriously understaffed and overwhelmed. My advice is to keep checking your transcript on the IRS website - sometimes it updates there before you get any official notice. And whatever you do, keep copies of EVERYTHING you send them.
How do you check your transcript? Is that something on the IRS website?
Yes, you can access your tax transcripts through the IRS website by creating an account at irs.gov/account. Once logged in, you can request various transcript types - the "account transcript" is most useful for tracking audit status as it shows all activity on your account. If you're not tech savvy or have trouble with the online verification, you can also request transcripts by mail using Form 4506-T, but obviously that takes longer to receive.
My sister went through an audit for the same thing and had her case resolved in about 4 months, which was faster than they initially told her. The key is calling the examiner directly if you have their contact info on any of the notices. Don't just sit and wait! Sometimes files get stuck at the bottom of someone's pile.
Your coworker isn't alone. This is a HUGE problem with financial literacy in the US. I teach personal finance at a community college, and the tax refund misconception is one of the first things I address each semester. I've had students argue with me that "the government gives you money back at tax time." When I explain withholding, many are genuinely shocked. I use a simple exercise where students calculate how much more they'd have each month by adjusting their W-4 vs getting a lump sum refund, and the lightbulbs finally go on. Our education system completely fails to teach basic financial concepts like this, and it hurts people financially in so many ways.
Do you have any recommendations for resources to learn this stuff as an adult? I'll admit I never really understood taxes that well and just use TurboTax every year.
For adults looking to build financial literacy, I recommend starting with the IRS's own Tax Withholding Estimator on their website. It helps you understand how adjusting your W-4 affects your take-home pay versus your refund. The Consumer Financial Protection Bureau (CFPB) also has excellent free resources on their website that explain taxes in plain language. Khan Academy has a personal finance section that includes tax basics. For books, "Get a Financial Life" by Beth Kobliner explains taxes and other financial concepts in very accessible terms. The most important thing is finding resources that explain concepts without unnecessary jargon - understanding the principles matters more than memorizing tax code details.
Before I learned how taxes worked, I also thought refunds were basically government money. My friends and I would get excited about refunds and plan how to spend them like it was some kind of bonus. Nobody ever taught us this stuff in school. It wasn't until my first accounting class in college that I finally understood I was just getting my own overpaid money back. I felt pretty stupid, but honestly, the way people talk about refunds ("I got $3,000 back this year!") makes it sound like you're receiving something rather than just getting your own money returned.
One thing I haven't seen mentioned here - you should also get your financial situation in order ASAP. You'll likely end up on a payment plan with the IRS, and they'll want to see your current finances. Start gathering bank statements, credit card statements, loan documents, etc. Figure out your current income, expenses, assets, and debts. The IRS will use this information to determine what you can reasonably pay each month. Also, if you have any ability to start setting aside money now for the eventual tax bill, do it. Even if it's not enough to cover everything, showing good faith by having some payment ready can sometimes help negotiations. Depending on your situation, you might want to look into tax relief options like an Offer in Compromise, but your attorney will guide you on that.
Is there a specific form the IRS uses to collect this financial information? I'm dealing with a different tax issue but also need to show my financial situation.
Yes, the IRS typically uses Form 433-A for individuals or 433-B for businesses to collect financial information when setting up payment plans or considering settlements. It's extremely detailed - asks about all income sources, expenses, assets, and liabilities. They may also request supporting documentation like bank statements and pay stubs. I recommend starting to compile this information early because it can take time to gather everything. Also, be completely honest on these forms - the IRS can verify much of this information, and additional dishonesty at this stage would only make your situation worse.
PLEASE don't admit to fraud directly!!! I made this exact mistake and it turned a simple audit into a criminal investigation. Let your attorney do the talking. The language you use matters enormously. There's a huge difference between "I can't find documentation for these deductions" and "I made up these deductions." One is a documentation problem, the other is admission of a crime. Your attorney will know how to navigate this, but whatever you do, don't contact the auditor before speaking with an attorney, and don't volunteer information about intent. Let the attorney handle all communications - that's literally what you're paying them for.
This is the best advice here. The distinction between poor documentation and intentional fraud is HUGE in the eyes of the IRS and the law. Let your attorney frame the situation appropriately.
Thank you so much for this warning. I definitely would have just blurted everything out in panic if I hadn't read this. I'll make sure to let the attorney handle all communication and not volunteer anything about what I was thinking or intending. I've contacted a tax attorney who specializes in these cases and have an appointment tomorrow morning. I'm going to bring copies of all the audit letters and my previous tax returns. Should I prepare anything else for this first meeting?
Mason Stone
Quick question - does anyone know if not filing 2021 taxes will affect my 2024 tax filing that I'm about to do? Will the IRS system flag me when I try to file this year's taxes?
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Kylo Ren
ā¢Filing your 2024 taxes shouldn't be directly affected by your unfiled 2021 return. Each tax year is technically treated separately. The IRS system won't automatically block you from e-filing your 2024 return just because 2021 is missing. However, there can be indirect effects. If you're claiming certain credits or deductions in 2024 that relate to prior year information, there could be verification issues. Additionally, if the IRS has already started sending you notices about your unfiled 2021 return, it's best to address that situation promptly rather than filing a new year while ignoring the past issue.
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Makayla Shoemaker
Anyone else notice that the IRS seems WAY more aggressive about unfiled returns lately? My brother got a scary letter about his unfiled 2020 return even though they actually owed him a refund. Seems like they're doing a big push to get everyone caught up.
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Christian Bierman
ā¢Yeah the IRS got a funding boost recently and they've been upgrading their systems to better track unfiled returns. They're definitely sending more notices out. But I've heard they're still prioritizing high-income non-filers over people who made under $25k. They go where the money is!
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