The Potential Penalties of Unfiled Taxes

Having to deal with unfiled taxes sounds like a real nightmare — and in many ways, it can be. In fact, not filing your taxes can actually have greater consequences than filing a return and failing to pay the taxes owed. That’s why it’s so essential to get help with your taxes if you’ve neglected to file in the past. If you still aren’t convinced, you may want to take a closer look at some of the possible penalties you could face for unfiled tax returns.

Failing to file your tax return can result in a few financial penalties. First, you could face a failure-to-file penalty. This is a late penalty that equals 5% of the total amount in taxes due and continues to increase in percentage for every full (or even partial) month you fail to file your taxes. In the end, this could represent 25% of the total amount of taxes owed and would be considered a civil fraud penalty. On top of that, you may be responsible for a failure-to-pay penalty; this fee is imposed by the IRS and comprises 0.5% of the taxes you owe. The IRS also charges interest on unpaid taxes, meaning you could owe 3% to 10% interest on a quarterly basis. However, the consequences of unfiled taxes are not limited to monetary fees.

Not filing your tax return could also cause you to lose out on potential tax credits and your rights to tax refunds. The IRS might even determine that you owe money to them even when you really shouldn’t. In some cases, the IRS will automatically complete a substitute federal return (SFR) for you with information they already have. SFRs usually have no dependents, only one exemption, and the standard deduction — which means if you actually have dependents, qualify for additional exemptions, or itemize your deductions, the SFR will reflect you owe more than you should. This can cause problems down the line, particularly if you’ve failed to file due to not being able to afford the taxes you already owed. In addition, keep in mind that with unfiled taxes, the statute of limitations for audits never actually begins. If you were to file your tax return, the IRS would have only three years to conduct an audit. But if an SFR is created instead, the IRS maintains the right to audit it no matter how much time has passed.

There are other potential complications and consequences that come with not filing your tax return. You will likely have much more difficulty obtaining a loan, as lenders and financial institutions will need to see copies of filed tax returns to determine whether you’re a good candidate. Not being able to produce these forms will not reflect well in your favor. And if you wish to qualify for either Chapter 7 or Chapter 13 bankruptcy, your tax filings will need to be current (usually within the last two to four years).

Now come the most serious consequences. If you do owe money to the IRS and fail to file your tax return, the IRS may choose to pursue serious collection activities like tax liens (which show up on your credit report), wage garnishment (which will withhold wages from your paycheck to go towards tax debts), bank levies (which can impact your bank accounts and your ability to conduct business), and seizure of assets (which can include your home, your vehicle, and your property). And while incarceration isn’t exactly a common consequence of unfiled taxes, be aware that this can happen. Federal law states that you can face up to a year in jail and be hit with up to $25,000 in fines just for failing to file your return. Although you cannot go to jail for merely owing taxes, failing to file them or purposefully evading taxes can land you behind bars. For that and the other aforementioned reasons, it’s far better to file your return and not be able to pay the full amount owed than to not file your return at all.

Unfiled tax issues need to be rectified as soon as possible. It’s best to work with a qualified tax professional on these matters. For more information, please contact us today.