If you missed this year’s tax filing deadline, you may face penalties and a number of other consequences that will only get worse if you do not take your income tax filing seriously. The consequences of not filing taxes vary by situation, but regardless of your unique tax or financial situation, the sooner you rectify your situation with the IRS, the better off you will be.
Potential Consequences of Missing the Deadline
Consequences of missing the tax filing deadline range from no real punishment at all to serious penalties, interest, tax audits and harsh collection actions. Here are the possible consequences of missing the deadline, listed in order from least serious to most serious.
- No Penalties and No Loss of Refund: Applicable only if you are owed a refund and you do file your taxes within a reasonable time frame, it is possible that you will receive neither penalties nor loss of refund. If you are owed money and do not file within three years, you forfeit your right to your refund.
- Loss of Refund: Although you do have a full three years to file for your refund, you will not receive interest on the taxes that the IRS owes you, so it is highly suggested that you file sooner than later. Filing sooner also limits the possibility of the IRS taking action if they believe that you actually owe money in income taxes.
- Failure-to-Pay Penalty: The failure-to-pay penalty is charged when taxes have been filed but not paid. This penalty is .5% a month and can reach a maximum of 25% of the original tax bill.
- Failure-to-File Penalty: The failure-to-file penalty is charged when taxes are owed and no return has not been filed. This penalty is 5% a month and can reach a maximum of 25% of the original tax bill.
- Combined Penalty: The combined penalty is charged when taxes are unfiled and unpaid. This penalty is technically a combination of the failure-to-file and failure-to-pay penalties, but is actually only 5%. The failure-to-file penalty is reduced by the failure-to-pay penalty until the failure-to-file penalty reaches its maximum. The maximum that this combined penalty can reach is 47.5% of the original tax amount owed.
- Tax Collections: If taxes go unpaid and/or unfiled with no resolution, the IRS will eventually begin its collection process. To begin, the IRS will file your tax return for you and assess you with taxes that are likely more than what you actually owe since no deductions or credits will be given. During the collection process, the IRS will send you a series of increasingly harsh letters. Letters may eventually turn into phone calls and further IRS actions, such as tax liens and tax levies (i.e., bank levies, wage garnishments and asset seizures).
- Tax Fraud Penalty: If the IRS determines that, in an attempt to evade taxes, you intentionality did not file a return, you can face penalties of up to 75% of the original tax amount owed.
- Prison: In rare circumstances, individuals who fail to file a tax return may face up to one year in jail and fined $25,000 for each year in which a tax return was not filed.
How to Minimize Penalties and Other Negative Consequences
In almost all scenarios involving missing the tax filing deadline, the sooner you take action to resolve your situation, the less harsh the penalties and consequences will be. There are a number of explanations and excuses for missing the tax deadline and each one of them has a solution. Here are some common reasons for missing the deadline and the suggested actions you can take to resolve your unique situation. If you:
- Didn’t have time to file: Find the time to file as soon as you possibly can. If you owe taxes then the sooner you file, the lesser the penalties you suffer will be. If you are owed a refund then the sooner you file, the sooner you will receive your refund.
- Couldn’t afford to pay your taxes: Not filing taxes because you cannot afford to pay leads to higher penalties than if you were to file and not pay. In this situation it is best to file as soon as possible in order to stop the failure-to-file penalty from increasing over time. Once taxes are filed, you can work with the IRS to arrange a payment plan. The most common method of paying back taxes – when paying in full is not an option – is through an installment agreement. Once you have entered into an installment agreement, the IRS will not pursue collection actions and the failure-to-pay penalty against you will decrease to only .25% a month.
- Wanted to avoid paying taxes: Not filing taxes will not help you avoid them. The IRS has complex matching systems that get more sophisticated every year, making the likelihood of getting away with not filing and not paying very rare. Even if it was consciously intended to evade taxes, you can avoid tax fraud penalties by simply filing and paying your taxes — assuming the IRS already isn’t already investigating you.
- Intended to file but an unforeseen event occurred: Even if you do not owe taxes, it is important to file soon so that you can receive your refund. On the other hand, if you do owe taxes, the IRS will continue to charge penalties and interest until the taxes are filed and paid.
When Penalties Can Be Eliminated
There are some situations in which the IRS will reverse penalties charged if you can prove that you were unfairly held liable for not filing taxes. The IRS will potentially cancel penalties if there is reasonable cause for not filing taxes and not paying on time. In order to have penalties canceled you must prove to the IRS that a specific circumstance or event prevented you from taxes from filing or paying your taxes on time. The act of filing to remove penalties is called penalty abatement. Here are some examples of circumstances in which penalties can be abated:
- Natural Disaster: A flood, hurricane or some other natural disaster destroyed the location where your records were held or caused significant hardship that prevented you from being able to file.
- Death: The death of someone close, such as a family member.
- Absence of Taxpayer: You were in prison, rehab, held hostage, stranded on an island or in any other situation that prevented you from being able to access your tax records in order to file.
- Other: There are a number of additional events that the IRS considers to be reasonable cause for not filing taxes. The IRS will evaluate each person on a case-by-case basis. If you can prove that you attempted to file and/or pay on time but were unable to, it is possible to have your penalties abated.
Regardless of why you did not file or pay your taxes on time, it is important to resolve your situation quickly in order to minimize the negative consequences, especially if you owe taxes and are unable to pay. In the event that you are owed a refund, it makes no financial sense to give the IRS an interest-free loan. Taking action quickly will ensure a far better financial outcome than will avoiding the issue altogether.
About the Author
This guest post was provided by Matt Robinson. Matt is a tax professional and tax writer.
Photo Credit: John-Morgan