We all get busy and miss deadlines sometimes, but the IRS is not known for being sympathetic when it comes to late tax returns. If April 15 has come and gone and you haven’t completed your tax return yet, you may be wondering, “What happens if you don’t file taxes?”
If your tax return is late and you owe tax, you’ll begin accruing an IRS failure to file penalty, IRS penalty for late payment, and interest right away. You can still file your tax return after April 15, so it’s best to deal with this issue as soon as possible and keep your tax bill from growing too much.
However, if you have multiple years of back taxes, you may soon find yourself with overwhelming tax debt. You know what they say: “Nothing is certain but death and taxes.” Ignoring your taxes will only make the problem worse, so read on to see what happens if you don’t file taxes on time and how to fix it!
Keep in mind that this information is related to federal taxes; the penalties for state taxes may vary.
Failure to Pay Penalty
The IRS failure to pay penalty is 0.5% of the amount of tax owed, which is added monthly. The total penalty will not exceed 25% of the amount owed.
To avoid an IRS penalty for late payment, the best thing you can do is pay your entire tax bill by the April 15 deadline. However, if you can’t afford that, you can still make a partial payment by April 15 and pay back the rest of your bill as soon as possible. This will help keep penalties from racking up as quickly.
Failure to File Penalty
Many people don’t realize that filing your tax return and paying your taxes are two separate legal obligations—with two separate penalties! The IRS failure to file penalty actually adds up faster month to month.
The failure to file penalty is 5% of the amount of tax owed, which is added monthly. The total penalty maxes out at 25% of the amount owed.
If you owe no taxes or are due for a refund, you won’t receive a failure to file penalty. However, you only have 3 years to claim an IRS refund.
You can easily avoid extra penalties by filing your tax return on time, even if you can’t pay the tax owed. You can also request an extension, which must be filed by April 15 and will give you an extra 6 months to prepare your tax return. This gives you an extension to file (and avoid the failure to file penalty), though any non-payment penalties will still be added to your bill.
Interest on Unpaid Taxes
In addition to penalties, the IRS charges interest on unpaid taxes. The interest rates are determined each quarter of the year.
Unfortunately, interest is charged on the full balance due—including tax, penalties, and the interest that’s already accrued—and is compounded daily until the full balance is paid to the IRS. As you can imagine, interest can significantly add to your tax bill, so it’s best to address tax debt right away.
Can You Fight IRS Penalties?
You may be able to have a failure to file penalty or failure to pay penalty removed by preparing a Reasonable Cause Statement. Some reasons that the IRS will accept (with the right documentation) include natural disasters and serious illness.
Not Filing Tax Returns Leaves an Open Window for the IRS to Come After You
Normally, the IRS has 3 years to initiate an audit and 10 years to collect assessed tax debt.
But there’s a catch—the clock starts when the tax return is due or when you file, whichever is later. So if you never file your tax return, the IRS can come after you any time.
What Happens If You Don’t File Taxes for Multiple Years?
You can go back and file your old tax returns at any time. However, if you don’t file taxes, the IRS may file a substitute tax return (known as an SFR or Substitute for Return) on your behalf using the information they have available—typically within about 6 years of the original due date. They won’t bother to find credits and deductions that would save you money, so you may end up owing more tax this way.
The good news is that you can still file your delinquent tax return and contest the amount due after the IRS has filed a substitute on your behalf. The IRS may accept your corrections right away, but if not, there are still options for appeal. Give our experienced tax attorneys a call if you have several years of unfiled tax returns or if you want to contest your tax bill!
Not Filing Taxes Can Lead to Snowballing Tax Debt
If you have unfiled tax returns and owe money to the IRS, you may find yourself facing tax debt that just grows more and more overwhelming as time goes on. The IRS has 10 years (or, if you never file, no time limit) to collect your taxes and can take extreme measures to do so, including levying funds directly from your bank account.
The first step to resolve tax debt is to go back and file any tax returns that you’ve missed. If you don’t file tax returns, you won’t qualify for tax debt relief options like the IRS Fresh Start Program, Installment Agreements to repay the debt over time, or an Offer in Compromise to reduce your debt.
Keep in mind that even if you enter a repayment agreement with the IRS, penalties and interest will continue to add up until the debt is fully paid off.
How to File and Pay Back Taxes
To file and pay back taxes, you need to prepare the delinquent tax returns and mail them to the IRS. At minimum, you’ll need income statements such as W-2s and/or 1099s. It can sometimes be difficult to gather these forms for past years and you may have to pay a small fee for accessing the records. You can also request copies of income statements from the IRS.
Because tax laws change each year, we recommend using a tax software to prepare your delinquent returns or, better yet, using a tax professional. A professional can help with more complicated tax situations, including if you’re self-employed; if you have investments or other sources of income beyond wages; if you’re missing documents; or if you need to negotiate with the IRS.
The back tax returns must be mailed to the IRS with a separate envelope for each year. We recommend using certified mail to ensure the IRS receives your returns. You can use Direct Pay on the IRS website to pay any balance due.
Need help with late tax returns? Call our tax attorneys!
Our Chicago tax lawyers have years of experience handling back taxes and resolving tax debt. Don’t hesitate to reach out if you need help!
