Let us first talk about compliance as defined by the IRS. Compliance according to them is filing your income taxes. If taxpayers owe back taxes, they are prohibited from reaching a tax resolution if they have not filed their tax returns.
Some of the taxpayers need to file several years at a time. The source of income may not be available to taxpayers. So we usually go to the IRS to order transcripts to obtain such information. One of the benefits of having those transcripts is to match exactly the tax returns that need to be filed with IRS records.
Matching, in addition to establishing the correct liability and accuracy, also saves the IRS time and effort. The reason behind this is the fact that the IRS will chase the taxpayer if there is underreporting. They discover underreporting by matching what is filed with what they have in their records. That is why we save them the agony of sending notices such as CP2000 and following up on the case that will remain open until it is resolved after possible correspondence back and forth.
You would think that the IRS would have invested interest to provide the needed tax help by giving you the old years for those reasons. But alas, the IRS would establish a cutoff beyond certain old years which is understandable. The bones that we have to pick with the IRS are the year they choose for cutoff after which they refused to give you wage and income transcripts.
The tax problem that we face is the following: the IRS requests that we file a certain old year. If they had matched the available transcripts with the tax returns that still need to be filed that would have made the life of the taxpayers much easier. There is a way to obtain the transcripts differently. I have tried that way. Sometimes you get the transcripts and sometimes you don’t. And above all it may take sometimes months when time is of the essence.
I have had revenue officers give me a deadline before collection action such as levy and wage garnishment was to start. During that time I had to file tax returns for which I did not have the information. The time he gave me was not sufficient to obtain what I needed. So you are left on your own.
Summary: Transcripts are important to provide the tax help needed to prepare returns and proceed to a tax resolution such as an offer in compromise.