Failure to File a Tax Return

For many people, preparing and filing tax returns is a dreaded chore—especially if there’s a tax bill at the end of it. We may fantasize about chucking all of our receipts and forms in the wastepaper basket, and just forgetting the whole thing. Well, there’s a reason most of us ignore that temptation. Failure to file a tax return can lead to much worse headaches than completing one. And it doesn’t matter that you may be a “small fish” in the eyes of the Internal Revenue Service; sooner or later, you may very well pay (in a variety of ways) for your failure to file taxes.

What’s the worst that could happen? Keep reading to find out.

You Could Lose Your Refund.

Most Americans are entitled to a tax refund after they file their taxes. But while the IRS expects you to pay your taxes on time even if your tax return is filed late, you can’t expect them to write you a check if you fail to file your tax return. The good news is that if you are entitled to a tax refund and do eventually file your taxes, you can still get the refund. The bad news is that you only have three years after the date the tax return was due to file it. After that window closes, any unclaimed refund that would have been due to you reverts to the government and is lost to you forever.

The IRS Could Prepare a Tax Return on Your Behalf.

You’ve probably noticed that your W-2, Form 1099 and other forms used to report your income so you can prepare your taxes indicate that a copy of the form is also sent to the IRS. In some cases, the IRS uses that income reporting information to prepare an income tax return on your behalf. If this information sounds like great news, think again. When the IRS prepares a tax return with your income information, you lose the opportunity to claim tax deductions and tax credits which might have reduced your tax bill or even netted you a refund.

The IRS Could Have Longer to Collect What You Owe.

After a taxpayer files a tax return, the IRS has three years from the filing date in which to audit the return and record an assessment. (An assessment is when a taxpayer’s tax liability is recorded in the office of the Secretary of the Treasury; it is what establishes the right of the IRS to collect a tax that is owed.) The IRS usually has a period of 10 years from the date of an assessment to collect on a tax debt.

However, if you fail to file a tax return, the clock doesn’t start ticking on those three-year and 10-year periods until you do file (or the IRS files for you). That means you could end up having to pay taxes long after they were originally due.

You Could Have to Pay Interest and Penalties.

The IRS expects taxes to be paid when they are due, regardless of failure to file a tax return. When those taxes aren’t paid on time, interest begins to accrue immediately. That interest compounds daily until your tax bill is completely paid. How much interest? It varies with the current federal short-term interest rate; the IRS charges that rate plus three percent. Because the federal short term-interest rate is adjusted quarterly, the amount of interest on your unpaid taxes will probably fluctuate if it takes you a while to pay your taxes.

Interest is only part of the story, however. You could also be liable for penalties, including late filing penalties. The IRS imposes a “failure to file” penalty that is 5% of the unpaid taxes due for each month or partial month that the return is unfiled. However, if your return is more than 60 days late, the minimum failure to file penalty is the lesser of $435 or 100% of the tax due that the return would show. The failure to file penalty maxes out after five months.

However, there is also a late payment penalty if you have not only failed to file your taxes, but haven’t made the payments that are due. The late payment penalty is 0.5% of the unpaid taxes per month, up to a maximum of 25% of the unpaid tax bill. If a failure to file a tax return is found to be fraudulent, you can expect to be hit with fraudulent failure to file penalties in addition to those described above. The penalty for fraudulent failure to file is up to 75% of the tax that is due and unpaid. If you don’t pay the penalties that have been assessed against you, rest assured that the IRS will charge interest on those, as well.

You Could Be Charged With a Crime and Even Go to Jail.

Is failure to file a tax return a crime? Yes; it can be charged as a federal crime. Depending on the circumstances, it may be treated as a misdemeanor or felony. Not everyone who fails to file a tax return gets charged with a crime, of course, but do you really want to take the chance? If it’s determined that you committed an overt act of tax evasion, you could be convicted of a felony and be sentenced to jail (and more fines).

The consequences described above are for failure to file federal taxes. But if you’re not filing your federal taxes, chances are you have a failure to file state taxes on your hands, too. That can pile on additional consequences.

Failure to File Tax Return: The Bottom Line

Filing your taxes and paying them may be painful, but not as painful as having to deal with the consequences of not filing them on time. A tax professional can easily help get you an extension to file and may be able to work out a payment plan for you if needed. To learn more, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.