What Happens If You Don’t File Your Taxes?

As the famous saying goes, there are only two things certain in life — death and taxes. This is a timeless truth. Anyone who has attempted to evade paying taxes can attest to its validity. It should be noted, however, that failing to file a tax return when required is not advisable. Similarly, neglecting to pay the taxes owed is unwise. Yet, it’s natural to wonder about the consequences of not filing a tax return. You wouldn’t be the first person to entertain thoughts of avoiding the tax authorities altogether. Sometimes, genuine mistakes or legitimate circumstances can lead to inadvertent oversight of tax obligations.

Here’s an exploration of different scenarios related to these questions. If you neglect to file your taxes or pay what you owe, here’s what might transpire in reality.

There are only two instances where you are not required to file a tax return. The first is if you have no taxable income and therefore owe no money. This can happen if you did not earn any income or if you earned income but claimed the standard deduction, which reduces your taxable income to zero. However, experts advise filing a return regardless to ensure clarity with the IRS about your financial situation.

The second scenario is when the federal government owes you a refund. Yet, there’s a crucial caveat: you must file a return within three years to claim your refund. If you fail to do so, the IRS has the right to withhold your refund.

If you are mandated to file a tax return, it must be submitted by April 15th, known as “Tax Day.” If this date falls on a weekend, the IRS designates a different specific day. Failing to meet this deadline incurs penalties:

  • Starting from April 16th, the IRS imposes a monthly “failure to file” penalty.
  • This penalty amounts to 5% of your outstanding tax bill for each full or partial month of delay.
  • The maximum penalty is 25% of your tax bill.
  • For 2020, the minimum penalty is $435, or 100% of your tax bill if you owe less than $435.

However, there is a silver lining. If the deadline is looming and you realize you won’t be able to file on time, you have options. You can request an extension from the IRS. Alternatively, if you meet the criteria, you can complete Form 4868. Upon approval, the IRS will grant you a new deadline. It’s crucial to adhere to this extended deadline, as failing to do so will still incur the same penalties mentioned earlier for not submitting your income tax return on time.

Interestingly, the initial financial penalties for not filing a tax return are more severe compared to those for filing on time but not paying what you owe. Here’s a breakdown of what you can expect for the 2020 tax season if you file your return on time but fail to pay your taxes:

  • The IRS will impose a “failure to pay” penalty of 0.5% of your tax bill for each month your taxes remain unpaid.
  • This penalty is capped at a maximum of 25% of your total tax debt.
  • Additionally, compound interest, calculated daily, will be added on top of the penalty.
  • Over time, the interest can significantly increase the total amount you owe, potentially making the “failure to pay” penalty more costly than the “failure to file” penalty. The IRS determines the interest using the current short-term rate plus 3%. If left unchecked for a year or more, your tax debt could balloon far beyond its original amount.

Let’s say you neglected your tax responsibilities: first, by missing the filing deadline, and then by failing to pay your taxes after eventually filing. In such cases, the IRS may waive the “failure to pay” penalties and apply only the “failure to file” penalties.

If this is your initial offense, the IRS might show leniency if you meet certain criteria. Typically, you can qualify for a first-time penalty abatement under these conditions:

  • You were not required to file a tax return in the three years preceding the abatement request.
  • There are no outstanding tax returns in your name from previous years.
  • You either have no outstanding tax balance, or you’ve arranged a payment plan with the IRS and are complying with its terms.

If you don’t qualify for this abatement, it generally makes more sense to pay late rather than to file late, as the short-term financial penalties are lower.

There are various valid reasons why individuals may struggle to pay their taxes owed. For instance, unexpected financial emergencies may deplete savings earmarked for taxes. Alternatively, significant losses in investments could impact available funds. Additionally, prioritizing repayment of high-interest debts like bank loans or credit cards may take precedence.

In such scenarios, financial experts recommend taking the following steps:

  • Pay as much as possible toward your tax balance to minimize interest penalties.
  • Contact the IRS to establish an installment payment plan.
  • Ensure timely payments according to the agreed-upon plan.
  • Maintain open communication with IRS representatives if you encounter difficulties making an installment payment due to valid reasons.
  • Aim to keep your payment plan duration to 120 days or less to avoid potential administrative fees imposed by the IRS for longer-term plans.

The consequences of failing to file a tax return and ignoring IRS demands for payment are severe and should not be underestimated. If you choose this path, the IRS has the authority to impose serious penalties:

  • Garnish your wages until all outstanding taxes, penalties, and interest are fully paid.
  • Place liens on any real estate you own, potentially leading to foreclosure.
  • Initiate criminal prosecution, which could result in a prison sentence.

Ultimately, delaying payment or ignoring tax obligations only prolongs the inevitable. It is crucial to settle what you owe promptly or negotiate alternative arrangements with the IRS. Ignoring tax issues will not make them disappear and can lead to dire consequences.