Welcome to another tax season. Many Americans might put off filing their federal income taxes until the last minute. H&R Block stated in March 2018 that a third of taxpayers who file before the April 15 deadline wait until April to do so. Then there are those who simply don’t file.
Forbes reported in 2014 that about 7 million Americans fail to file income tax each year. If you are one of them — and to be clear, we recommend that you ALWAYS file an annual income tax return — what can you expect to happen when that catches up with you?
NOTE: There is a difference between not paying your taxes and not filing your taxes. These differences extend to penalties, as well. Here we will be focusing exclusively on failure to file taxes and the ramifications.
If the IRS Owes You a Refund
First, it’s important to understand that not filing a tax return can only go sideways for you if you owe the government money. If it’s the other way around and the IRS owes you a refund, then it doesn’t matter if you file–at least not to them.
TurboTax called this one of the best-kept secrets with regard to federal tax returns. This is because the penalty for filing late is a percentage of what you owe, and any percentage of $0 is $0. However, you can’t get your refund until you do file a return. So you may want to claim your money, because you only have three years from the original due date to claim your refund.
If You Owe the IRS
Assume, though, that you happen to owe the government money. This is when things can go off the rails for you really quickly. Note that the IRS’ goal is to get you file and pay your taxes. Each step they take is an escalation intended to make you do that.
Thus, the first thing you can expect is for the IRS to notify you in writing that you haven’t filed. In Business Insider, Julius Green of Baker Tilly said, “The IRS gives you multiple opportunities to get it right. They have to send you a notice before taking any action, and usually they need a response in 30-60 days.” As you might expect, you ignore these notices at your peril. Because, as H&R Block has said, the IRS will put you into a tax delinquency investigation.
Next, the IRS will attempt to complete a tax return for you.They call it a Substitute for Return (SFR). According to Rosenberg, this is intended to be a wake-up call, as the SFR will be written in the government’s favor, using their assumptions about your financial state.
You could also face financial penalties, including a failure-to-file penalty. This penalty costs you 5% of your unpaid taxes for each month that passes. The good news: it can only go up to 25%.
AIf you continue to ignore your obligation, the IRS can:
- Place a federal tax lien on your property.
- Seize your property outright.
- Seize any future tax refunds to which you may be entitled.
- Ask the U.S. State Department to revoke your passport or prevent you from getting one
Finally, you could find yourself wearing an orange jumpsuit. Yes, you can eventually go to jail for each year that you didn’t file a return.
How NOT to Run Afoul of the IRS
In other words, file your tax return on time. Do that and all of the pressure the IRS can bring to bear will simply not happen. And if you can’t meet the April 15 deadline — whether you have a real reason for not being able to meet the deadline or just an old-school procrastination — file for an extension. That will give you an additional six months to file your tax return and keep you out of hot water with the IRS.