When the clock hits midnight on December 31st each year, it’s the beginning of more than a new year. Once you’ve finished your champagne and singing Auld Lang Syne, you realize that it’s also the beginning of tax season.
Tax season is a great thing for people who anticipate generous refunds from Uncle Sam. Tax season is not so great for those who anticipate that they’ll end up owing hundreds or even thousands of dollars. For those people, it may be tempting to try and dodge their tax liability entirely by not filing their tax returns.
Having unfiled taxes is not the type of debt you ever want to carry around. This can be daunting to bounce back from, and you may be subject to several penalties.
Approximately five percent of Americans fail to file their taxes each year. Unfortunately, dodging the IRS is more difficult than you might think, and the repercussions for failing to file are huge. Read on to learn the consequences of unfiled tax returns.
Getting up to speed on your returns is key, and you’ll also need some legal help to avoid penalties and stop the bleeding. Consider these points to know exactly what you’re up against.
How Far Back Does the IRS Go For Unfiled Taxes?
The IRS can go back up to six years to audit a tax return that has been filed. However, if you have unfiled tax returns, the IRS can require you to file them for any year that you have not yet reached the statute of limitations on assessment. In general, the statute of limitations for assessment is three years from the date the tax return was due or filed, whichever is later.
However, there are exceptions to this rule such as in cases of fraud or failure to file a return. It’s important to note that failing to file a tax return is a serious matter and can result in penalties and interest charges in addition to any taxes owed.
Possible Penalties for Unfiled Taxes
1. You Will Get Fined
The Internal Revenue Service (IRS) will first and foremost include penalties if you fail to file your taxes on time. It starts with a late payment penalty, but the fines can become more significant the more amount of time that passes.
The IRS takes filing taxes very seriously. For that reason, they issue costly penalties that continue to grow when someone fails to file their taxes. These are known as failure-to-file penalties, and they continue to increase each month you don’t file.
To start, the IRS charges you five percent of your unpaid taxes each month your return is late. This charge is capped at five months, or twenty-five percent of your unpaid taxes. In addition to this, the IRS charges you either $135 or 100 percent of the money you owe, whichever is less, if you are more than 60 days late.
Let’s say you owe the IRS $1,000 in taxes and make no effort to file your taxes for at least five months. In addition to the $1,000, you’ll end up owing the IRS $1,385. Multiply this by multiple years and tack on interest and you’ll be on the hook for a huge amount of money.
2. Your Tax Debt Will Accrue Interest
The longer you go without paying your taxes, the more you will end up owing in the long run. This is the case because your taxes will keep generating interest the longer you take to pay them.
You will receive several notices from the IRS each month regarding your unfiled taxes, and they’ll show how much interest has accrued with each statement.
3. Tax Evasion Investigations are Possible & You Might Face Criminal Charges
This is the most serious consequence for failing to file and pay your taxes. The two criminal charges associated with the IRS are criminal tax fraud and criminal tax evasion.
Criminal tax fraud occurs when specific elements of fraud are present, including deception, misrepresentation of material facts, submission of false or altered documents, and failure to submit important documents. Tax evasion occurs when you take measures to avoid paying your taxes.
Aside from a simple failure to pay, it’s also possible that you can face tax evasion charges for your unfiled taxes.
This gets into the criminal side of the law, and you can face time behind bars and fines upwards of $100,000 — not to mention having a felony on your record. Because these investigations are thorough and time-consuming, you’ll also have to account for the amount of money you will need to pay in legal fees just to defend yourself.
4. The IRS Might File Your Return For You If You Fail to File
Another unwanted circumstance is that the IRS can process your unfiled taxes for you.
When this happens, they’ll simply take the amounts that others have reported paying you, and will file, without taking any deductions or other circumstances into account. This way, you will likely end up paying more than you should rightfully owe.
5. The Government Can Withhold Your Refund Check
There’s also a chance that the government can withhold your refund check if you are owed one.
For many people, this is a time of year when you can use this check to take care of debt, purchase something you’ve always wanted, or even start a business venture. People that have kids and other dependents, or those who purchase a home or a green-friendly car will definitely want to receive any refunds they’re owed.
Aside from your tax refund check, the government can even take your passport to keep you from traveling abroad. This can be a huge mess if you’ve had your heart set on a vacation, or if you travel a lot in your line of business.
6. Tax Debt Can Hurt Your Credit
Once your tax debt reaches a certain level, it can begin affecting your credit as well. More specifically, you can have a lien put on you record that is seen as a very big red flag on your credit report.
As such, it makes it difficult for you to get lending or credit cards moving forward, and it can take years to recover from this type of blow.
You are entitled to sign up for a payment plan, so consider exploring that option before letting your credit take a hit.
A tax attorney can help you to negotiate an offer in compromise that will minimize your tax debt and let you get back on your feet. They can also help you take advantage of the fresh start program, which gives you more time and breathing room to handle your tax debt.
7. Your Entire Debt Can’t Be Wiped Out With Bankruptcy
If you are thinking of not filing your taxes because you can’t afford to pay them, then it’s also possible that your overall financial situation is not the best. The US government has come up with a failsafe for citizens in a financial bind with the Bankruptcy Code.
Getting tax forgiveness via bankruptcy isn’t so cut and dry since not all of it can be discharged.
Many people who have huge tax bills that they can pay, in addition to other bills, can include their tax debt in Chapter 7 bankruptcy and have the debt discharged. You can also include tax debt in a Chapter 13 bankruptcy, but the debt is restructured rather than discharged — you’ll still end up paying the debt in full.
One of the many caveats to including tax debt in bankruptcy, however, is that you have to have filed all of your tax returns at least two years before filing for bankruptcy. If you file for bankruptcy and you haven’t filed, then the court will dismiss your case and you will have to wait to file again.
Bankruptcy is usually an option when a person is up to their eyeballs in debt. But since it’s not as readily available to address tax debt, you may very feel as though you are running out of options.
8. You May Still Owe Your Local and State Governments
In addition to federal taxes that you owe, never forget about the obligations that you still have to your state and local governments.
These tax bills will keep coming as well, and you are dealing with an entirely different department of taxation, which has different protocols than the Federal government. This further complicates the issue, in addition to adding to the interest that will keep building on taxes that you owe overall.
9. Tax Liens
If you dodge the IRS’ calls long enough, they’ll be forced to look to other means to collect what you owe them. One way they do this is through a tax lien or a levy.
The IRS does this by filing a Notice of Federal Tax Lien as a public document that your other creditors can see. The tax lien then attaches to your property, typically your house or land you own. Once the lien is attached to your property, then the money you owe the IRS will be deducted from the sale of your property at the time you choose to sell it.
Once the IRS has taken out a tax lien against you, those taxes will no longer be eligible to be discharged in bankruptcy. For these reasons and more, it’s important that you take care of your unfiled tax returns and your tax debt before it reaches this stage.
Nobody is Safe From Adverse Action by the IRS
In the world of personal finance, it is common knowledge that when you default on a credit card or a car note, the creditor has between three to ten years in while they can file for a judgment against you. This is known as the statute of limitations, and it dictates how long something is actionable in court based on state or federal law.
If you assume that if you dodge the IRS for long enough, you’ll eventually be clear of all tax liability because the statute of limitations has run out, think again. There is no limitation on the IRS’ ability to collect back taxes and penalties from you if you don’t file your taxes. It is only after you file your taxes that the IRS has a ten-year time limit in which to collect the money you owe them.
Long story, short, failure to file your taxes deprives you of your ability to have your tax liability last for ten years rather than a lifetime. Even if you think you think you won’t be able to pay what you owe, you should always file your taxes.
IRS Assistance Is Only Available If You File All Your Back Taxes
Despite the IRS’ reputation for being difficult to work with, they’re actually pretty reasonable. In fact, the IRS offers extensions and several payment plan options for taxpayers who can’t afford to pay their taxes before the dreaded April 15 deadline.
These are great options for people who are facing a high tax bill and can’t afford to pay it before the due date. But these options are only available to taxpayers who actually file their taxes.
Get Help With Your Unfiled Taxes
Having debt from unfiled taxes can be a huge burden. Thankfully, there are solutions in place.
In addition to getting up to speed on taxes, tax professionals can assist you with audits and any tax-related litigation. You can look no further than the Silver Tax Group when you need this type of service.
Failing to file your tax return may seem like a good way to avoid tax liability and the stress of owing money to the IRS. That safe, stress-free feeling is short-lived, however. Unfiled tax returns have the potential to come back and haunt you so long as you are alive and they remain unfiled.
We can help you out with all types of tax issues, whether you want help filing an offer in compromise, or assistance fighting a tax case in court. We’re the tax attorneys that can help you, and would love to explain how with a free consultation.
Our team of tax attorneys is on call to answer your questions 24 hours a day and 7 days a week. Take some time out to contact us via the web, or give us a call at 855-900-1040.
