So I have not filed my returns. What is the first step.
You need to engage a qualified tax attorney to assist you with your filing requirements right away. The IRS has a policy of not prosecuting taxpayers who fail to file their tax returns, if the taxpayer takes steps to get his or her tax returns filed before he or she is contacted by someone from the IRS about the delinquent returns. While many accountants have assisted taxpayers in this situation, they are not typically familiar with the pitfalls that may await a taxpayer in this situation. In the event of a criminal investigation, the accountant will be the number one witness against you at trial. There is no attorney-client privilege with an accountant.
Next step is to get draft tax computations prepared.
After the attorney is engaged, he or she will work with you (and maybe an accountant hired by the attorney) to prepare tax computations for the delinquent tax years. We find that it is much cheaper for the lawyer to hire an accountant to prepare these computations, as opposed to the lawyer doing the work. From this, the lawyer can determine if there are other issues that could present a problem, or if you should proceed with having tax returns prepared and filed. You may or may not use the same accountant to prepare the actual tax returns as the one who prepared the tax computations. There is no attorney-client privilege with the individual who prepares a tax return for filing - whether or not this individual is an attorney or working for the attorney.
If everything goes well, then we file the tax returns.
Inasmuch as you are trying to get the returns filed before you are contacted by someone from the Internal Revenue Service about the delinquent returns, and you are trying to minimize the possibility of being audited, you need to deploy a strategy in filing the returns that will accomplish both of these goals to the greatest degree possible. However, assuming everything was appropriate in step 2 above, this step will get you back in the system, and most of the way toward being straight with the IRS.
The next step is to deal with the outstanding tax liability. In this context, it is much better if you are able to fully pay the tax debts due to the delinquent returns. This is usually not the case, and you will need to work out a strategy for dealing with the debt. Filing the returns, and not dealing with the tax liability can result in a bad outcome. The IRS' policy of not prosecuting taxpayers who fail to file their returns is not clear when it comes to paying the taxes, and it does not appear to cover a taxpayer who does not address the tax debts.