The IRS requires you to file a tax return if you earned over the standard deduction for your filing status during the tax year. The standard deduction changes every year, and as of tax year 2022, it is $12,950 for a single filer and $25,900 for a married couple filing jointly.
You also must file if you had more than $400 in net self-employment earnings or you owe any special tax, such as the alternative minimum tax, the additional tax on a qualified retirement account, Social Security or Medicare taxes on tips you didn’t report to your employer, household employment taxes, or recapture taxes. People who are claimed as dependents on other people’s returns also have complex filing rules that dictate if they need to file or not.
Figuring out if you have to file a tax return can be confusing if you have a complex filing situation. You may, in some cases, realize you were supposed to file after the fact. You could also know you were supposed to file, but you may have just forgotten. The consequences are the same whether you didn’t know you had to file or you simply forgot. This guide explains what can happen if you forget to file your return.
Consequences of Forgetting to File Your Tax Return
The IRS will realize you forget to file your tax return when it receives and reviews forms about you from other entities. Say, for example, your employer sends a W-2 to the IRS and it shows earnings over the standard deduction for your filing situation. The IRS will know based on this document that you were supposed to file a return. This is just one example.
The IRS could also receive paperwork showing you had a taxable distribution from a trust, taxable retirement income distributions, or a 1099 form for nonemployee compensation. Here is what will happen when the IRS realizes you didn’t file.
Penalties and Interest
The IRS charges a failure-to-file penalty, and it applies the very first day you are late. The penalty is 5% of the tax due. Imagine your return shows you owe $5,000 in tax. Your failure-to-file penalty will be $250. This applies every month until it reaches 25% of your balance. Your late filing penalty based on a $5,000 tax liability could get up to $1,250.
The IRS also assesses interest on your balance. The interest applies to your tax liability, but you also incur interest on your penalties. The interest rate varies, and it adjusts quarterly. It’s the prime rate, plus 3%.
You will face these penalties if the IRS finds you and asks you to file a return. You will also face these penalties if you file your own return late. Say, for example, you file your return two months late. The IRS will then send you a bill for the penalties, and it will be 10% of your balance due, plus interest. This is based on two 5% failure-to-file penalties for the months you were late.
Substitute for Return
The IRS may file a substitute for return (SFR) when someone doesn’t file a tax return. The IRS generates this on your behalf. It generally reflects the income employers or other entities have reported to the IRS in your name. It typically does not include any deductions or credits.
This can lead to a significantly higher tax assessment than you would have faced if you had filed your own return. Say for example, the IRS received 1099-NEC forms showing $20,000 of self-employment income. The IRS generates an SFR, and you face a self-employment tax of 15.3%, plus income tax. Your tax bill in this case is at least $3,060.
Let’s say, in contrast, you filed a tax return, and in addition to reporting the $20,000 in self-employment income, you also reported $8,000 in self-employment expenses. That brings your profit down to $12,000, making your self-employment tax just $1,836. Deductions also help to reduce your income tax.
Unfiled returns with a tax liability can expose you to the IRS’s collection tactics. The IRS has a lot of power – more than most private creditors. It can take fairly drastic actions when you have unpaid taxes.
The IRS can’t decide on any amount to collect, however. You either need to file your unfiled returns to establish the tax liability, or the IRS needs to file an SFR and assess your tax liability. The IRS can then issue tax liens against you. The agency can also garnish your wages, take funds from your bank account, and levy your personal or real property. The IRS can even take homes for unpaid taxes in some cases.
Possible Evasion Charges
You may, in a worst-case scenario, face evasion charges. This comes into play in situations where the IRS believes you haven’t filed your return because you were purposefully trying to avoid paying taxes. There are both criminal and civil evasion charges, and both can cost you a lot of money. Criminal tax evasion charges can even lead to jail time.
Forfeiture of Refund
Forgetting to file a tax return can also cause you to lose your tax refund. The penalties for late filing only apply if you owe the IRS money. You don’t have to file on time if you want to claim a refund, but you must file within three years of the original due date of the return.
You may have heard the IRS has 10 years to collect on a delinquent tax debt. This is true, and the deadline is called the collection statute of limitations. Here’s what you need to realize, however – the clock doesn’t start ticking until you file your return or the IRS assesses a tax against you. That means if you forget to file, you can’t just wait 10 years and the tax bill will automatically go away.
The tax liability will be there until you file, and then, once the liability has been established, the IRS has 10 years to collect it. The 10-year limit doesn’t necessarily apply to state taxes, though. Most states have their own deadlines. The California Franchise Tax Board, for example, has 20 years to collect on a tax debt.
What to Do if You Forgot to File a Tax Return
Be proactive about reaching out to the IRS if you have forgotten to file. It’s always better to contact the agency rather than to wait to have them contact you. Here are some tips to work through if you have forgotten to file your tax return.
Figure Out Which Returns You Need to File
You may have only forgotten to file for a single year, but if you haven’t filed for several years, you will need to figure out which years you need to file for. Look at the IRS’s filing thresholds for the years you didn’t file and also check to see if you owe any special taxes.
The filing threshold changes annually, so it’s important to look at the years you forgot to file. You typically only need to file five or six years’ worth of returns if you haven’t filed in years and you’re trying to catch up. The IRS, however, can require you to file all of your unfiled returns regardless of how far back they go.
Gather the Information You Need to File
You will need your income documents, information about your business revenue and expenses, and details about your dependents to file a back tax return. You can contact the people who originally issued those forms to see if they have copies. You can also get this information from the IRS by setting up an online account and ordering a wage transcript.
Respond to the Substitute for Return
You definitely need to file your back tax returns if the IRS has issued an SFR in your name. The SFR, again, generally shows an unnecessarily high tax liability. You can contest this liability by filing your own return. File the usual version of the return – don’t use an amended return. The IRS will typically adjust your amount due when it receives your tax return.
Apply for Penalty Abatement
You will incur late filing penalties for the returns you file late if you owe a tax liability. You can, luckily, apply for penalty abatement. The IRS is particularly lenient about removing penalties if this is your first time incurring penalties or if you have reasonable cause.
File a form to request penalty abatement once you have filed. Make sure you file all of the needed forms so you can apply for relief on several years’ worth of penalties at the same time. You will need to explain why you didn’t file on time when you make your request for abatement.
Explore Options to Pay Your Tax Liability
Dealing with returns you forgot to file can often lead to a high tax liability. This, in fact, is one of the reasons people sometimes avoid filing a tax return. They don’t want to deal with a tax bill from the IRS or their state. That stress is understandable, but by not filing, you’re subjecting yourself to penalties and possible collection actions.
The IRS offers a lot of options for people who can’t afford to pay their taxes in a lump sum. Keep this in mind if you’re worried about filing. You can generally make arrangements on your tax debt once you file. The following sections outline some of your options.
Apply for a Monthly Payment Plan
You can make monthly payments, for example, through an IRS installment agreement. You need to be able to pay off the liability within six years (72 months). You can set up a payment plan without providing a lot of financial details if you owe less than $50,000. You may need to make a financial disclosure if you owe more than that or if you owe between $25,000 and $50,000 and don’t want to set up direct debits from your bank account.
Look Into an Offer in Compromise
An Offer in Compromise is when you make an offer to pay part of your tax liability, and the IRS decides if it wants to compromise on your bill. You need to send the IRS a full financial disclosure if you want to explore this option. The IRS will only accept your offer if it represents the most you can pay.
A tax professional can help you explore the options for your situation. You may, for example, qualify for a special program, such as innocent spouse relief, which comes into play when you have a tax liability due to your spouse or former spouse. They may, alternatively, tell you to apply for “currently uncollectible” status, or they may recommend one or more of the IRS’s other resolution options.
A tax pro can also help you negotiate with the IRS, and they can help you deal with your state revenue agency if you have unfiled state returns, as well.
Get Help From the Silver Tax Group
We understand how to deal with unfiled tax returns, and we can help you get back into compliance with the IRS. Dealing with unfiled returns can feel scary and stressful, but we can help to make the process easier for you. Don’t wait any longer — contact us today to learn more about our services. We will start with a free consultation and then help you find the best way forward.