Ignoring this very important responsibility isn’t the solution, and it can lead to more serious problems down the road. In this article, we’ll talk about what happens if you don’t file your income taxes and the potential consequences. Learn about the penalties you could face from an IRS tax audit, interest charges that add up, and how this can affect your future financial plans.
Consequences of Not Filing Your Taxes
The Internal Revenue Service (IRS) takes this responsibility seriously, and there are repercussions for those who fail to comply. Whether you owe taxes or anticipate a tax refund, it’s best to file your tax return.
Failure-to-File Penalty
The failure-to-file penalty can be steep, costing you 5% of the unpaid taxes for every month or partial month your return is late. It caps out at 25% of the total unpaid taxes, but that can still be a significant amount.
Failure-to-Pay Penalty
What happens if I don’t file my income taxes on time, but also don’t pay the taxes owed? In that case, there’s an additional penalty of 0.5% of the unpaid amount for every month or part of a month you’re late. Similar to the failure-to-file penalty, it’s capped at 25% of what you owe.
If you are in a situation where you are hit with both penalties at the same time, they combine. While it’s true that the IRS can reduce the failure-to-file penalty to 4.5%, you are still potentially facing an additional 5% every month on what you already owe. But the consequences go even deeper.
Accruing Interest and Collection Actions
In addition to these penalties, the IRS tacks on interest to any unpaid taxes. To determine how much interest you’ll owe, the IRS factors in the federal short-term rate, which changes, but then they tack on another 3%.
So, even if you are dealing with a relatively small tax liability, those interest charges can make the debt grow rapidly. The interest is added to not only the unpaid taxes but the penalties as well. Imagine you owe $2,000 and let things slip for a year. At an 8% interest rate (that is what it was in early 2024) you are now looking at paying $160 more just in interest for that year.
Failing to file taxes or pay your debt can trigger more forceful actions from the IRS. What happens if I don’t file my income taxes year after year? This is when things get scary, as this can eventually lead to wage garnishment or levies on bank accounts and even seizing your assets to recover their due.
The Statute of Limitations: Myth Versus Reality
While the IRS does have limitations when it comes to collecting what you owe, you may still find yourself facing consequences even 10 years later. The catch here is the countdown begins after you file your taxes, not from when they were originally due.
What does that mean? It means even if you wait to file until you are hit with a bill from the IRS, you could end up owing on a debt that is 10 years old.
Dealing with an IRS Notice of Deficiency
If you find yourself faced with a dreaded notice of deficiency (also called a “90-Day Letter”), you’ll have a limited window, specifically 90 days from the date stated on that notice, to take action.
The options involve either submitting your original tax return or, as a bold alternative, taking a stand by filing a petition with the US Tax Court to dispute their findings. While facing tax debt can be unsettling, some legal processes and strategies may offer some potential pathways to relief.
Why Filing Matters Even If You Don’t Owe
Many believe the only time to file your tax return is when you’re sure you’re going to owe money. This could be due to claiming the standard deduction instead of itemizing, or not having enough write-offs from things such as Form W-2 income. In reality, your tax obligation may end up being zero, and a decent percentage of American households fit this bill every year.
Don’t Miss Out On Your Refund
So, what happens if I don’t file my income taxes and am expecting a refund? Well, it’s probably not what you want to hear, as you’ll miss out on getting that money back. If you had taxes withheld from your paycheck, or if you qualify for certain refundable tax credits, the only way to claim that money is by filing your tax return.
These tax penalties are essentially free money that is rightfully yours. Some even give money back even if your income is too low to owe taxes, such as the earned income credit or the child tax credit. Keep an eye out for refundable tax credit opportunities that are especially helpful when trying to save up.
How Long Can You Wait?
The IRS holds onto your potential refund, ready for you to claim. As an example, In 2024, over $1 billion was unclaimed for tax year 2020. Of course, there’s a time limit. Typically, you have three years from the original filing deadline to claim what is rightfully yours, but don’t wait any longer.
What Can You Do?
What happens if I don’t file my income taxes this year, but know that I really should? Fortunately, if you need a little extra time, filing for an extension can be done online. Just submit Form 4868 before the tax deadline, either electronically or through mail.
It is also a good idea to see if you can get one of these payment plans going so you can sleep a little better knowing you have things handled.
Short-term Payment Plan
For a short-term payment plan with the IRS, taxpayers have a time frame of up to 180 days to settle their tax debts.
This plan does not involve any set-up fees, and individuals can make payments through various methods such as Direct Pay from their bank account or by using a debit, credit card, or check. It is important to note that fees may apply if payment is made via a credit card.
Long-term Payment Plan (Installment Agreement):
On the other hand, the long-term payment plan, also known as an installment agreement, allows taxpayers more than 180 days to pay off their tax liabilities. In this arrangement, there is a $31 fee for using direct debit payments, which may be waived for individuals with low income.
However, a $130 set-up fee is applicable for payments made through methods other than direct debit, such as debit/credit card, mail, or in-person payments, which may also incur additional fees.
Seek Professional Help for Tax Filing
So, what happens if I don’t file my income taxes for an extended period? Sadly, it could mean that the IRS can pursue the debt pretty much indefinitely. They can potentially use measures such as wage garnishment, freezing your accounts, and placing liens on personal assets.
If you feel completely overwhelmed or lost about what happens if I don’t file my income taxes, you always have the option to get in touch with a knowledgeable tax professional. Creative Tax Solutions can walk you through every option.
Our team of agents and CPAs has over 25 years of experience in dealing with the IRS on behalf of their clients. We provide a range of services focused on providing immediate tax burden relief and helping individuals clear up their financial situations. Feel free to reach out to us to schedule a free consultation.
