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.
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.
Possible Penalties for Unfiled Taxes
1. Potential Late Fees
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. The IRS Might File on Your Behalf
If you fail to file a tax return, the IRS doesn’t have to wait for you to get caught up. The IRS can opt to file a tax return on your behalf. While this might seem like a great outcome, substitute refunds are not the same thing as filing on your own.
When you file your tax return, you have a complete picture of your financial picture. You know how much you paid for student loan interest and how much of your rent or mortgage you need to write off for a home office. The IRS, however, doesn’t have any knowledge of these things.
When the IRS files a substitute tax return, they do not include any credits, exemptions, or deductions that you would otherwise have qualified for. Moreover, the IRS only files these tax returns when they have a substantial belief that you owe them some money. Thus, they file the tax return on your behalf and begin tax collection actions.
3. Unfiled Tax Returns Lead to Bankruptcy Complications
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.
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.
4. You Can Lose Out on a Refund
One way the IRS can collect on the taxes you owe them is to automatically deduct the money you owe from any future possible income tax refunds.
If you haven’t reached that point yet, but you find yourself in the position of receiving a tax refund after you have failed to file a tax return, then you only have three years from the due date of the tax return to claim your refund. This means, on top of owing back taxes, penalties, and interest, you’re actually losing an opportunity to receive the money Uncle Sam owes you.
At any given time, the IRS is sitting on over $1 billion in unclaimed tax refunds. Once the clock runs out on claims, that money belongs to the government.
5. Big Buys Might Be Impossible
There are many big moments in a person’s life, but some of the proudest moments are when you make the truly big purchases like your first family home. Unless you have enough money in cash, these big purchases require financing. Owing money to the IRS amounts to more than a minor complication.
This is especially true for people who freelance or own their own business. Lenders require verification of income before they will agree to lend to you, and if you don’t have a W-2 or 1099, lenders will rely on your income tax return for income verification. If you haven’t filed your taxes, then lenders will not have any way to verify how much money you make.
More importantly, if you or a dependant intend on applying for federal financial aid in order to attend college, you won’t be able to apply for assistance without your tax return.
6. 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.
7. 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.
The good news is that criminal charges for failure to file and pay your taxes are uncommon. Your tax debt needs to be at least $70,000 to trigger a criminal investigation by the IRS. If you do meet the minimum requirements for a criminal investigation, you’ll be facing a felony conviction, jail time, and fines.
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.
Ready to Get Your Taxes Back on Track?
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.
The only way to get back in the good graces of the IRS is to get caught up on your taxes and pay what you owe. If that sounds like an insurmountable task, then we have good news for you — we can help. Contact us today to see how we can get you caught up on your unfiled taxes and on the road to financial recovery.