Penalties for Not Filing a Tax Return

A surprising number of people fail to file an income tax return. If you are one of those people and you think the IRS won’t notice, you need to reconsider your position. If you are unable to pay your taxes, you still need to file a return. Not doing so will eventually lead to a domino effect of negative consequences. Even if no legal action is taken against you,failure to file a tax return will end up working against you. Let’s take a look at the rules regarding filing your taxes and the various outcomes that you risk:

Most Adults are Required to File Tax Returns

If your income is less than the standard deduction and you don’t owe self-employment taxes, ACA penalties or refunds or qualify for a refundable credit, then you probably don’t have to file a tax return. However, with health and family assistance all tied to the tax return, almost all individuals, estates and trusts have to file a return and may have to pay taxes. These are two different things, and there are penalties involved with ignoring or rejecting each of them. Even people who don’t have the money available to pay the tax that they owe are better off sending in a tax return rather than skipping the process. Here’s why:

  • The IRS imposes a fee for not paying your taxes, and they impose a separate fee for not filing a return. The larger of the two is imposed for not filing, 4.5%, compared to just 0.5% for not paying, and that fee gets charged every single month. You can end up paying up to 22.5% for failure to file and 25% for not paying. In addition, interest on unpaid taxes accrues from the return’s due date until you pay. So whether you can pay or not, you’ll save yourself big fees by submitting the required paperwork.
  • In addition to incurring fees, consideration must also be given to the actions that the IRS takes when they do not receive a tax return from a taxpayer. The process involves the preparation of a substitute return which will be completed without consideration of tax advantages, deductions or write-offs, and which leads to a higher calculated amount owed than would be the case if you prepared and filed the return.

The IRS is limited by a rule known as the statute of limitations which gives them three years from the date that you file to perform an audit. The three-year clock starts when you file a return, so the sooner you get the paperwork in, the sooner your risk of being audited expires. That statute also applies to any refund you might have coming. Three years from the date of filing you forfeit any refund.

What happens if you file your return without paying the taxes you owe?

Once the IRS processes a return that is not accompanied by payment, or discovers a taxpayer’s failure to file and pay taxes, they issue a Notice of Tax Due and Demand for Payment that will detail how much you owe in taxes, interest, and penalties. You are able to submit payment via cash, money order, credit card, check or electronic funds transfer, and the sooner you submit payment the better, as penalties and interest will continue to accumulate. If you don’t have the funds available, it is better to contact the IRS and discuss your problem with them than to ignore the notification. Options for resolving your payment issue include:

  • Allowing a temporary delay. This is generally offered after a review of your situation, during which time the agency may file a Notice of Federal Tax Lien. This document will allow the government to put a placeholder on the amount that you owe them until such time that you are able to pay.
  • Setting up an installment agreement. This allows you to make smaller monthly payments based on what you can afford.
  • Settling through an Offer in Compromise. This is an agreement that is only possible after all other options have been exhausted, allowing you to pay a lower amount than what is owed. It is issued after a complete review of your financial situation and addresses penalties and interest along with the original tax amount itself.



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