What Happens If You Don’t File Your Tax Returns?

Failing to file your tax returns can turn into a real mess. What happens if you don’t file your tax returns?

Financial penalties

If you don’t file, there is a late filing penalty of 5% of the tax owed PER MONTH with a maximum of 25%. So, missing your extension deadline by a week is going to cost you 5% of the tax owed on the return.

If you don’t pay, there is a late payment penalty of .5% per month with a maximum of 25%. If you haven’t filed or paid, you’ll only get charged the 5% late filing penalty for each month until that penalty caps at 25%. Then, the late payment penalty starts in.

You can calculate the penalties using this handy calculator. If you’re owed a refund, the good news is that you don’t get hit with the late filing penalty. THAT penalty is kind of worse; if you don’t file to get your refund, you LOSE the refund after three years. So, people who are owed a refund on their unfiled 2014 returns have only a few months left before that refund is gone forever. If you haven’t filed your 2012 or 2013 returns yet, those refunds are now pain for having put the problem off.

If you ignore the problem, the issue escalates

So, let’s say you just miss one year. You’ll get a letter from the IRS asking you for your tax return. Let’s say that you’re like most people, and you stuff mail from the IRS into a basket and never look at it again. That basket sits like a Stephen King monster, haunting your dreams and terrorizing you whenever you walk by it.

The next thing that could happen is that the IRS could file a substitute return FOR you. The IRS will take all of the information that they’ve received in your behalf and then put that together into a tax return. Doesn’t sound so bad, eh? You’re off the hook!

It’s not that easy. The IRS won’t calculate itemized deductions for you, nor will they calculate any credits you may be entitled to, student loan interest deductions, children or other dependents. Just the income and the tax received.

If the IRS does prepare a return for you, they’ll send you a notice letter. You have THIRTY DAYS to respond, or that becomes your tax return. The IRS then sends you a “Notice of Deficiency”, which is the official assessment of tax you owed. You then have NINETY DAYS to respond to the notice of deficiency by filing your tax return. Once that ninety days has passed, that is it. You can’t then file a tax return and have that one be the result on which your tax bill is based.

You should ALWAYS open mail you receive from the IRS right away. Make a note of the deadline in the mail they have sent you and get on top of handling it.

I didn’t get the notice letters because I moved

You remember the first time you heard the adage “Ignorance of the law is no excuse”? That applies here as well. If you’ve moved since the last time you filed a tax return with the IRS, you should file a change of address form with the IRS just as you do with your car insurance and bank account. Just because the notices went to some old address doesn’t stop the clock or excuse you from responding.

What’s the worst that can happen?

Okay, that goes like this:

You keep ignoring the IRS. You’ve moved a time or six, and they seem not to be sending you any more notice letters. Let’s say that you haven’t filed for about four years now. And, let’s say that you’ve got a job and they’re filing W-2s for you each year. If the IRS prepared returns show that, even without any deductions or credits, you don’t owe them any money, you’ll just forfeit your refunds. However, you won’t be able to buy a house, or start filing tax returns again until you get the missing returns caught up.

But, what if you have a job, they’re filing W-2s for you each year but you OWE money? After ignoring a few tax return filings, you’ll discover that the IRS has filed a lien against you and that you can’t borrow money, can’t get hired for some jobs, can’t sell any real estate, can’t really do much of anything. That has your attention, and eventually you’ll go to the IRS and fix things.

When things can get really ugly is when you’re self-employed or have your own business, and you don’t file. Fairly quickly, the IRS will send a compliance officer out to your home (they know where you are) and let you know in person that you have a short period of time to get your missing returns filed along with an IRS collections statement so that you can be directed to enter into a payment plan.

I’ve been doing this for many years, and I’ve helped people clear through a decade or more of late tax returns, but a week ago, I learned what happens when the IRS officer has made contact with you, given you a deadline and you ignore that deadline. An IRS agent comes to your door and serves you with a summons to appear at the IRS with your tax returns, your collection statement AND ALL YOUR SUPPORTING DOCUMENTATION. They give you about two weeks. You cannot reschedule this appearance, and you’d best show up with everything that they ask for.

And, let’s say that you skip THAT. The next step is criminal - the IRS can put you in prison for only two things - fraud and refusing to file. I had a client back in the 1990s who had an IRS agent with a badge and a gun show up at his door and give him 24 hours to deliver his returns.

So, the worst that can happen? You can go to prison and have your property, bank accounts and any other assets seized and auctioned off. That’s pretty “worst” in my book.

Okay, so what do I do now?

Pull together as much documentation as you can. Hire yourself a tax professional who’s good at helping people get caught up; they will help you get transcripts of your IRS accounts so that you have everything that was filed under your social security number. Make this your priority until it’s handled. Don’t be one of those very few who will join Al Capone in having spent time in Federal prison for ignoring the problem and hoping it will just go away.

We can help you get your tax returns filed, resolve your tax obligations, reconstruct your records - give us a call and let us help you finally get some sleep at night.

Greg Melon