What is the IRS six-year compliance rule (and why does it matter)?

Many Americans dread tax season, and for good reason: It's stressful. Make one simple mistake on your tax filings and it could cost you. End up with a few mistakes and the resulting tax bill could be tough to cover. And, if you fall behind on filing your taxes, things could get even more complicated. The Internal Revenue Service (IRS) tacks stiff penalties onto unfiled tax returns, after all, and the agency doesn't just forget about your old tax obligations, either. 

But if several years have passed, the idea of catching up on filing may feel overwhelming. There is something that might make this type of situation a little less daunting, though: the IRS six-year compliance rule. This rule is one of those little-known guidelines that can work in your favor if you're trying to get back on track with the IRS. It essentially sets some boundaries on how many years of back taxes you're expected to file. While it's not a get-out-of-jail-free card, it's a way to make things right without digging through a decade (or more) of paperwork.

So let's break it down: What is the six-year rule, how does it affect you if you've got unfiled taxes and what's the smart way to move forward?

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What is the IRS six-year compliance rule?

At its core, the six-year compliance rule is a policy the IRS uses when working with taxpayers who haven't filed in a while. It allows them to get back into compliance by filing just the last six years of tax returns — even if they've missed more than six years of filings. This isn't a law written in the tax code; it's more of a general enforcement guideline the IRS uses in most cases.

So, let's say you haven't filed since 2015. Technically, that's 10 years of missing returns. But under the six-year rule, the IRS will typically only require you to file taxes for the last six years to be considered current. Once those six years' worth of tax filings are submitted and accepted, you're usually off the hook for the earlier years — unless there's fraud or unusual circumstances that are also at play.

It's worth noting, though, that this is a general rule, not a hard-and-fast guarantee. The IRS always reserves the right to go back further, especially if they suspect criminal activity or if your unfiled years involved large amounts of income. But for the vast majority of taxpayers just trying to get back on track, six years is the standard.

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How does this rule impact me if I have unfiled taxes?

The six-year compliance rule can offer relief if you've been putting off filing your taxes because you thought you'd have to do 10 or even 20 years' worth of returns. That mountain of paperwork is what keeps a lot of people stuck in place. But if you only have to file six, suddenly the idea of digging up old documents and filing your taxes becomes a lot more doable.

And while no one really wants to deal with the IRS, they tend to work a lot more favorably with people who come forward voluntarily to resolve these types of issues. So, if you file those six years on your own or with the help of a tax professional, you're showing good faith. That can go a long way in avoiding penalties, reducing your risk of audits and even qualifying for programs like installment agreements or an Offer in Compromise.

Keep in mind, though, that if you're due a refund for any of those years, you typically only have three years from the original due date to claim it. So while the IRS may not require you to file taxes for 2016, if you were owed money that year and didn't file by 2019, that refund is gone. 

On the other hand, if you have tax debt related to any of the six years you're required to file, the IRS can — and likely will — come after you. That's why it's smart to get ahead of the issue before they come knocking.

The bottom line

If you've got unfiled tax returns, don't panic. The IRS six-year compliance rule exists to make it easier for most people to get back into the system without having to unearth a decade's worth of financial history. For most taxpayers, getting current means filing just six years of returns — not 10 or 20. That's a manageable number, especially if you decide to get professional help with the issue, whether from a tax relief company or another type of tax professional.

And remember, the IRS generally wants to work with you, not against you. They'd rather have people voluntarily come forward and fix the issue than spend time and resources chasing you down. And, filing those six years of taxes can be your first big step toward peace of mind, financial stability and avoiding more serious consequences down the road.

So, if this rule applies to you, now's the time to take advantage of it. Don't let fear or procrastination keep you stuck. The path forward may be easier than you think.