The tax filing deadline is quickly approaching. If you’re a U.S. citizen or legal resident, you are required to file if you meet certain requirements, such as gross income amount, age, and filing status. But, what happens if you don’t file taxes? In most cases, you’ll be facing some serious and expensive consequences.
Consequences of Not Filing Taxes
Whether you forget to file your taxes on time or do it intentionally, the consequences for not filing a tax return can be pretty steep. You may be assessed penalties and interest, have a lien placed on your property, or have your wages garnished. In cases where the IRS believes you intentionally refused to file or pay, you may even face jail time. Check out the scenarios below to see the consequences you could face if you don’t file on time.
Filing and Paying Late? Penalties and Interest Start to Add Up
The failure-to-file penalty is 5% of the unpaid taxes for each month or part of a month that your return is late. Here’s how it’s calculated:
- Month 1 = 5% of taxes due
- Month 2 = 5% of remaining taxes due plus $435 or 100% of your tax liability, whichever is less
- Months 3, 4 & 5 = 5% of remaining taxes due
The failure-to-file penalty will not exceed 25% of your unpaid taxes. If you don’t owe any taxes or are due a refund, you won’t be assessed a failure-to-file penalty, but there are other consequences, which we’ll discuss later.
The failure-to-pay penalty is .5% of the unpaid taxes for each month (or part of a month) they remain unpaid. If the failure-to-pay and failure-to-file penalties are both applied, the total penalty charges will be 5% of your unpaid taxes. This is because the failure-to-file penalty will be reduced to 4.5%.
The failure-to-pay penalty increases to 1% if you fail to pay within 10 days after receiving an IRS Notice of Intent to Levy. Unlike the failure-to-file penalty, however, the failure-to-pay penalty will continue to accrue after 5 months. It will only stop once it reaches 25% of your unpaid taxes.
Generally, interest accrues on any unpaid tax from the due date of the return until it is paid in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent. Interest compounds daily. Currently, the interest rate is 8% (Oct 2023).
When adding in penalties and interest, your unpaid tax bill can quickly grow and become overwhelming. That’s why it’s so important to file and pay on time.
Haven’t Filed in Several Years? There’s More at Risk
If you have several years of unfiled taxes, there’s more at risk than just the penalties and fees mentioned above – even if you don’t owe any taxes or you’re due a refund.
Limited Time to Collect a Refund
You only have three years from the original filing deadline to file and claim any tax refund due. If you wait any longer, you forfeit your refund.
Statute of Limitations Extended
For those who may owe money, it’s even worse. The IRS generally has 10 years (statute of limitations) to collect taxes, but that timer doesn’t officially start until you file. So, waiting to submit your return until you have the money isn’t a good idea.
The IRS Will File on Your Behalf
Additionally, if the IRS believes you owe taxes, they may file a Substitute for Return (SFR) on your behalf. They’ll do this by using your W-2s and 1099s to determine your income. They won’t, unfortunately, include any deductions or credits you may be eligible to claim. This typically results in a higher tax bill than if you had filed on your own.
Collection Efforts Will Increase
After sending you numerous letters and notices requesting payment, the IRS will increase its collection efforts. A lien will likely be placed against your property. You may also have your wages garnished and your assets seized. If you owe more than $59,000 (adjusted annually for inflation), you could also have your passport revoked.
Steps to Take If You Can’t File or Pay on Time
There are many valid reasons why someone may not be able to file on time. Maybe you had a medical emergency or an unexpected death in the family. You could also be waiting on the financial documentation needed to complete your return. Whatever the reason, thankfully, there are steps you can take to give yourself more time.
Request a Filing Extension
The easiest way to get additional time to file is to submit a filing extension request. You must submit Form 4868, Automatic Extension of Time to File U.S. Individual Income Tax Return, no later than the filing deadline. If submitted past the due date, it will not be considered. Although this gives you six (6) additional months to file, it will not give you more time to pay. If you believe you’ll owe taxes, estimate the amount and make a payment before the filing deadline. This will help minimize any penalties and fees you may face.
See If You Qualify For a Payment Extension
If you can’t pay any or all of your taxes due by the filing deadline, you may be to request a payment extension (Form 1127) if paying your taxes will cause undue hardship. Per the IRS, “undue hardship” means more than an inconvenience. You must provide evidence that you’ll suffer substantial financial loss if you pay by the due date. Once granted, you’ll have up to an additional six (6) months to pay your taxes. Although penalties will not be assessed if you pay by the extension deadline, interest will accrue until the tax bill is paid in full.
Apply for a Payment Plan
Another option for those who can’t pay in full on time is to apply for an IRS payment plan before the filing deadline date. You may qualify for a short-term (180 days or less) or a long-term plan. You can submit a request online, by mail (Form 9465), or by phone (800-829-1040). Setup fees ($0 – $130) vary based on the plan and the payment method chosen. It’s important to note that penalties and interest will still accrue. The IRS, however, will not garnish your wages or place a levy on your property, as long as your account is in good standing.
Catch Up on Unfiled Tax Returns ASAP!
As you can see, there are serious consequences for not filing or paying your taxes on time. If you’re behind one or more years, don’t wait any longer. Get your transcripts from the IRS and file your late returns ASAP! If you’re worried that you owe more than you can pay, or feel overwhelmed by the process, reach out to a tax professional for assistance. At Tax Defense Network, we specialize in preparing unfiled returns and helping taxpayers find the right tax relief solutions for their specific situations. For a free consultation and quote, please call 855-476-6920.