You should file all open years. The preparation process is the same as if you filed each year. You will, however, need to either obtain software for those years if you are going to handle this yourself or find a preparer if you do not feel comfortable with it. It will involve Federal and state returns for each open year. To determine which years are open you can call the IRS. Their website is at www.irs.gov. I am giving you this website because, just by being here, you have demonstrated an ability to surf the web.Once you have determined the open years you will need to gather the pertinent information which will include, if applicable to your situation, W-2's, 1099's. mortgage interest expense and real estate taxes documents, medical care documents, and unreimbursed work expenses. It may also include gambling income and loss information.If you are married in any of those years you will also need your spouses date of birth, full legal name, and Social Security number. You will need the same information for any children you may have.Take this to the the tax preparer, if you choose to utilize one and begin the process.
The key items here are to have all the information you can to make your task simpler and less stressful. I would personally recommend a tax preparer, preferably a CPA or tax attorney since they will have access to all the software you will be needing. Once all the returns are prepared, they should all go to the IRS and state tax agency together. There should be a cover letter explaining that you are trying to "come clean" and requesting abatement of penalties. The IRS does not usually abate interest. If you owe taxes, pay as much as you can with the submission to show good faith and to help reduce late charge accruals.
After the returns are submitted you will begin receiving a series of collection letters from each agency for each year. If you use the services of a CPA or tax attorney you can ask that person to submit an offer in compromise on these returns, if needed. The IRS and state agencies will require this representative to have a Power of Attorney form from you (and your spouse, if applicable). The preparer will have these available.
Once an offer in compromise is submitted (it is a good deal of paperwork), the IRS ans state tax agencies will review and consider the offer. They can accept it or reject it. If they accept and you do not honor the agreement the obligation will revert to the pre-offer amounts and they will become more aggressive in collecting.
There are a few additional points you need to consider. If you owe taxes for any year(s), the obligation can be satisfied by a refund offset from another year up to the full amount of the refund. However, if you have a refund due you for a return that is from a closed year (right now 2006 and prior) you will not be credited for that refund, nor will you receive payment. If you owe tax from a closed year it will need to be paid. There is no statute of limitations on the IRS or state collecting taxes due on any year.
As you can see, this is a bit involved and may be beyond the grasp of the average taxpayer or simply an overwhelming task to try to handle from start to finish. You are legally permitted to do this and represent yourself at all stages of the process but I do not recommend it.There is an emotional toll to be paid by trying to resolve all this without professional assistance and it may be one you are not willing/able to pay.
Please feel free to ask again if you need guidance with this process and I congratulate you for making this wise choice.