Let’s cover the big news first. If you do not owe anything on an unfiled return there is almost never a penalty. If you are due a refund you can still claim it up to 3 years late! - No, they usually won’t pay you interest. Interest is usually paid from a certain period after they were aware they owed you a refund. In other words, they have 60 days after receiving the return to refund your tax.
Most penalties imposed by the IRS and other taxing authorities are based upon the outstanding amount due. If you don’t owe anything with the return they will not impose a penalty.
So what happens if you have a mix of returns due? Back IRS taxes from several years? Let’s assume you owed tax in 2006. You couldn’t afford it so never filed. You also never filed 2007 or 2008, which were refund returns, for fear that they’d be quicker to catch on to your 2006 return. Well you’ll never get the refunds until all prior year returns are filed. The easiest way to handle this is to file all outstanding returns with a cover letter requesting that the refunds be applied to your outstanding balance. You should also request that late filing penalties be abated. Believe me, they will apply overpayments to balances due with or without your request, but it may appear that you are being cooperative. You may get lucky and get some leniency with the penalties assessed.
Just be aware that the longer you wait the worse it will be. Penalties and interest on the balance due returns will keep growing and the statute of limitations is runing on refunds. If you wait too long the refunds will no longer be available.
Be sure that when filing groups of returns that you never admit that the older refunds aren’t available. I have seen instances where an out of date refund was applied to a balance due. That was quite a while ago and systems might be better now but never throw in the towel. You stand a better chance of having a out of date refund applied to another tax year than ever getting the refund sent to you. It can’t hurt to ask.
Remember after April 15th, 2009 you will no longer be able to claim a refund from your 2005 tax return!
