Benjamin Franklin once mused that, “In this world nothing can be said to be certain, except death and taxes.” In the sense that these two realities are inevitable and cannot be ignored, this sentiment rings true.
Each year, between January and mid-April, millions of Americans are required to file income taxes. Small businesses and similar enterprises are required to file taxes on an annual basis as well.
Yet, if you failed to file your taxes last year or have perhaps failed to file your taxes over the course of multiple years, you are not alone. Many Americans have, for a host of different reasons, found themselves wondering what on Earth they should do about having failed to file their taxes.
More than 62% of Millennials stress about their finances on a weekly basis. Often, that stress leads to procrastination on more than just paying bills. People with financial stress often put off going to the doctor, buying food, or paying taxes. Tax season anxiety is real. And if you’ve not paid your taxes this year, you’re probably not alone. About 5% of the populace fails to file their taxes every year. What happens now? Are you going to jail? Will the IRS send a SWAT team to break down your door?
Thankfully, the IRS merely wants you to pay your taxes. Here’s what happens when you fail to file and what you should do about unfiled tax returns.
The History of Income Tax
The government hasn’t always required income tax filing. Except for a short time during the Civil War, for 130 years citizens in the United States didn’t have to pay a tax on their income.
Congress tried to levy a tax on income in 1894, but the Supreme Court shot down the bill. It was a flat tax and the constitution at the time required the government to consider state population when creating a tax.
This meant Congress must unanimously vote to change the constitution in order to create a tax on income. In 1913, they did just that. They ratified the 16th amendment which allowed the Federal government to tax individual income without considering state population.
March first was the original tax filing day. Congress pressed this date forward to March 15th then April 15th where it remained.
Now that the 16th amendment is in the constitution, it’s illegal to forget to file your taxes. And the Federal government now has the authority to collect those taxes by force through the court of law.
How Does the IRS Know You Haven’t Filed?
In 1998, the IRS Restructuring and Reform Act created a Taxpayer Advocate Service as an independent aspect within the IRS. This is supposed to give taxpayers a fair advantage in court.
You might think, “Hey! The IRS is so huge, isn’t it likely they won’t notice my tiny missing income tax filing? Why not just refuse to file?”
While, yes, the IRS is huge (73,519 full-time employees), they’re also super meticulous when they choose to be when it comes to unfiled tax returns. So, the best recourse is to file early and file often.
What are your chances of escape? Let’s roll the dice and find out.
IRS Audit Types
The IRS uses an audit system to catch missing or incorrect filings. It’s not unlike the TSA and their random patdowns or bag checks where the authorities rely on statistics to reduce load while still catching errors.
The most common audit is called the correspondence audit. The IRS simply sends you a letter if they’ve audited you and found an error. This could mean they found an error in your reporting document or they don’t have enough support for your claims in the document.
All you need to do is admit to the error or produce evidence that what you reported is true.
The second is an office audit. The IRS will ask you to come to their local office for an interview. You should probably bring a tax professional to represent you.
You don’t want to give the IRS more reasons to audit you further. A professional will stick to what they know and keep emotions out of the equation.
You can always appeal an audit if you’re not satisfied with what the IRS tells you in these meetings.
A field audit is rare. An agent will come to your home or business in this case. They’ll notify you beforehand so you can have representation.
The IRS might do this because they want to consult your local files or interview employees.
Most audits aren’t line-by-line audits. The auditors know where to look to find errors and to save time they only check those sections of a filing. But line-by-line audits do happen when the National Research Program decides to refine the IRS data collection process.
If a line-by-line audit happens to you, they’ll surely find a mistake. But again, this type of audit is rare.
What Are the Chances?
The chances of getting audited in any given year are high. The IRS audited one in 161 filings in 2017. That’s a 0.006% chance. Chances of home burglary is 0.004% chance and you still lock your doors when you leave.
3. What Can the Government Do to You If You Don’t File?
It’s not worth leaving up to chance whether the IRS will audit you. If you haven’t filed, file now. But if the prospect of getting audited still doesn’t compel you, here are the things that could happen if you don’t.
The IRS Has No Deadline to Collect On You
While unfair, the IRS could come after you for unfiled tax returns ten, twenty, thirty years from now. This is especially true if you continue to keep your returns to yourself.
During this time, the IRS continues to charge interest on what you owe them. This interest changes year to year. Interest is the federal short-term rate plus 3%.
This builds up until you owe 25%. This means there is a cap on how much you owe. But the trick is, each time you fail to file, they’ll assess interest on that individual filing.
Say you owe $4000 and you fail to file all year, you’ll owe $5,000. If you fail to file the next year, you’ll owe $10,000.
How much you owe continues to compound. And if you wait too long, you could end up owing 100s of thousands of dollars.
You Might Become a Criminal
You may not be hanging out in your underwear cooking meth out of a camper van. It doesn’t matter. If you don’t file your taxes, the Federal Government sees you as a criminal.
Now, the government can’t just wait thirty years for your income taxes to build up before charging you. In this, they do have a time limit. That limit is six years.
Again, the IRS wants its money. And it’s expensive to prosecute citizens. If you’re merely forgetting to pay your taxes, the IRS is going to send you plenty of unfiled tax return warning letters first.
You might receive the CP504 Notice or the Intent to Levy Notice. If the IRS owes you, they might threaten to take your refund if you owe them. If you don’t have a refund, they might threaten to seize your assets instead.
This could mean losing your car, your home, and other personal property. They can likewise seize your bank funds or your social security benefits or even garnish your wages.
If you own a business, they can seize your payments or your commissions.
Tax Evasion Is Different
Tax evasion is deliberate. You’re scheming to undercut the government by reporting/paying less or intentionally not paying.
Al Capone is likely the most famous example. Tax evasion is what finally brought the kingpin down. In 1931, Capone was sentenced to 11 years in Federal Prison and owed $215,000 in back taxes plus interest.
Tax evasion is less severe than tax fraud. It’s easier to prove someone intentionally avoided paying taxes than proving they were trying to defraud the government. Thus, if you’ve been undercutting the government, you’ll probably get slapped with lower penalties than tax fraud doles out.
Is Tax Avoidance Illegal?
Tax avoidance is like ducking punches in a bar fight rather than hitting back. It’s an entirely reasonable (and legal) way to deal with it.
Tax avoidance is the legal way to reduce your tax burden. It’s the primary reason why you should file your taxes. You might be surprised at what kinds of deals you can cut with the IRS through your filing.
Things like tax credits, business deductions, and legal tax shelters like a 401(k) plan are considered tax avoidance. And you should do everything legally within your means to avoid taxes. It’s your money, after all.
What Are the Consequences of Tax Evasion?
Tax evasion doesn’t just apply to Federal Income taxes. Unfiled tax returns could result in charges with tax evasion by both the IRS and your state tax agency.
Not filing is the least offensive crime under tax evasion law. You will only be fined up to $100,000 and receive a maximum of one year in prison.
If you put false information in your tax filing or you’ve created in any other way on your taxes, you could get up to $250,000 in fines and up to five years in prison. Honesty is the best policy when filing your taxes, especially if you don’t want to miss up to five years of your life.
Even if you aren’t the one evading taxes, you could be charged. Don’t help anyone evade taxes. If someone wants to launder money through your business, just say no.
Helping someone evade taxes could land you three to five years in jail. If your name isn’t Walter White, don’t do it.
4. What You Should Do with Unfiled Tax Returns
While all this information might have you quaking in your Birkenstocks right now, remain calm. If you haven’t filed and you missed the deadline for an extension (and the IRS audited you), the IRS will file for you based on your W-2 and other sources.
You’ll receive a letter notifying you of your substitute return. They’ll tell you what the income sources were and how much they think you owe.
You have thirty days to do one of three things:
- Complete and send in a tax return filing
- Consent to the assessment and pay
- Send a letter outlining why you couldn’t file
If you’ve not filed for several years, it’s wise to file now. You’ll avoid penalties and interest on your unpaid taxes. Or, in a best-case scenario, you’ll receive the money the IRS owes you.
How to File Back Taxes
If you’re finally filing back taxes, you want to get things right. The IRS is more likely to audit your filings if you’re paying back taxes and you don’t want to waste your time.
Gather All The Information
If it’s been a while since you filed, you might not have all the necessary documentation. You’ll need your W-2 and 1099 forms. For a fee, you can have the IRS send you this information.
File Your Return
If you own many assets and investments, you might want to consider hiring a tax professional. While you can use software to aid in your tax preparation, filing multiple returns can be complicated. And you want to streamline this process.
If you need time to complete these returns and you’re running up on the deadline, you can request an extension. You can also agree to make payments if the IRS has already told you what you owe.
Keep Up With the IRS
Once you’ve filed, you want to make sure the IRS is processing the return. While electronic returns have cut down on lost filings, the IRS is still a flawed institution. To be safe, you should still keep track of your filings.
You can ask for an account transcript if you want to keep track. This will allow you to see if the IRS received your returns and lets you know if you filed correctly.
Be sure to file all your returns. If you missed a return, your transcript should notify you of this.
What If the IRS Comes After You?
If the IRS does decide to charge you for unfiled tax returns, they must adhere to due process. This means a legal battle which you shouldn’t face alone.
If you have failed to file personal or business-related taxes in the past, it is important to avoid panicking and to face the issue head-on. Unfiled tax returns and the related penalties and interest can spiral out of control if allowed to compound.
Reach out to an experienced tax attorney to avoid a frustrating fate. Our attorneys are experienced in all matters of tax law and can help guide you to right your situation with the Internal Revenue Service, even if you do not immediately have enough money to pay whatever back taxes, penalties and interest you owe.
An attorney can help you to communicate with the IRS, address your previous filing gaps by submitting reconsideration returns and give you a picture of the penalties and debt you owe.
In addition, an attorney can help you to pursue a hardship resolution if you do not have the ability to pay the full amount that you owe the IRS. Do not let another tax season pass you by without addressing your previously unfiled tax returns.
Your chances of lessening your penalties increase if you hire representation. Get a free consultation and we’ll solve your IRS problems for you.