What Happens If You Have Unfiled Taxes?

What Happens If I Don’t File Taxes? From Nothing to Jail

Tax filing requirements can be complex and headache-inducing, especially if you’ve made a point of not thinking about taxes for several years. However, handling your taxes is not just a legal obligation. It’s also an important part of your financial well-being and security. Not filing tax returns can expose you to penalties and other consequences from the IRS, but it can also impair the rest of your financial life. 

If you haven’t filed your taxes—whether for just one year or more than a decade—you’re probably curious about what’s going to happen. Keep reading to learn more about the possible consequences, times you don’t have to file taxes, and what legal options you have. If you’re ready to get more personalized advice on your unfiled tax returns, call the W Tax Group at 877-500-4930 or contact us online.

Who Is Required to File Taxes?

IRS Publication 501 explains, among other things, who should file taxes and who is legally required to file taxes. First, those who earn above the standard deduction for their filing status must file a tax return. The threshold depends on the year and your filing status. 

For tax year 2022, someone with a filing status of single must file if they earned more than $12,950. However, people who are over the age of 65 have a slightly higher standard deduction, meaning that a single person over age 65 only needs to file if they earned over $14,700. The requirements are higher for those filing as head of household and even higher for those who are married filing jointly or are qualifying widow(er)s.

Even if your earnings fall below the limit for your filing status, certain circumstances require you to file regardless. If you meet any of the following criteria, you must file a return:

• Owe any special taxes reported on Schedule 2.
• Received Medical Savings Account (MSA) or Health Savings Account (HSA) distributions.
• Earned at least $400 in net (after expenses) earnings from self-employment.
• Earned $108.28 or more from a church or church-controlled organization.
• Received advance payments of the premium tax credit for health insurance premiums.

A few other rare circumstances could require you to file a tax return. To be on the safe side, you should check the tables in Publication 501 to see if you have any of the special circumstances requiring a tax return. 

Even if you are not legally required to file a tax return, you may want to consider filing anyway. You may be owed a refund, but you cannot receive it if you don’t file your tax return. The IRS recommends filing if you had income tax taken out of your pay, made estimated tax payments, or qualify for tax credits.

Consequences of Not Filing When You Should

The penalties for not filing a tax return vary depending on the situation. Even if you don’t face fines or criminal charges, you could still lose out on opportunities. For instance, many people who have federal and state taxes taken out of their income are actually owed money when they file their taxes, and they lose the right to that refund after enough time passes. 

In some cases, the consequences depend on luck. The IRS only has so much time and money to pursue those who are not filing or paying their taxes. In some cases, you cannot file and just fly under the radar for a while. However, it’s important not to assume that you’re free and clear simply because you haven’t received correspondence from the IRS. Failure to file does eventually catch up with you, and the longer you put it off, the more likely it is that you will get caught.

Loss of Refund and the Three-Year Limit

The IRS only gives you a three-year window in which you can receive your tax refund. The three years start on your original due date, which is typically April 15 or the nearest weekday. If you haven’t filed in three years, you may have lost the chance to claim your refund—every year, and taxpayers forfeit billions in unclaimed refunds. 

Limits on Your Financial Well-Being

Not filing your taxes can negatively affect your financial well-being. If you ever want to get a loan to buy a home, you will need to provide your tax returns. If you don’t have tax returns to show lenders, they generally have to assume that you have no income. This limits your purchase to what you can pay for in full at the time of purchase. 

Those who rent may also struggle to secure a home without tax returns. While some landlords will base their decisions on your paystubs, those who do more thorough checks—which often includes those who rent out nicer homes—are likely to request your tax returns. Often, you need tax returns to prove your income for personal loans and car loans as well.

Fines and Penalties

The IRS imposes penalties for failing to file. The failure-to-file penalty is assessed when you do not file by the due date. The amount you owe depends on how late you file and how much you owe. The penalty is 5% of the unpaid taxes for each month or partial month that the return is late, but it must not exceed 25% of your total unpaid taxes. In other words, the penalty maxes out after five months. 

If your return is more than 60 days late, the failure-to-file penalty is $435 or 100% of the tax required to be shown on the return—whichever amount is less. That amount goes up to $450 for returns due in 2023 and up to $485 for returns due after 2023. Furthermore, interest is charged on penalties.

The IRS also assesses a failure-to-pay penalty on top of the failure-to-file penalty. It ranges from 0.5% to 1% of your balance due every month, and it can also get up to 25% of your balance due.

Substitute for Return

The failure-to-file and failure-to-pay penalties are based on how much you owe on your tax return. Thus, the IRS cannot charge this penalty until you file a tax return showing how much you owe. However, if you never file, the IRS may eventually issue a substitute for return (SFR) on your behalf. 

An SFR generally shows all of the income that the IRS knows about but none of your deductions. For example, say that you have a 1099-K from payments you ran through a bar you own, and it shows $300,000 in payments. However, you also had $250,000 in expenses for buying liquor, supplies, rent, etc for your bar. If the IRS generates an SFR for you, it will show the $300,000 in income but not the deductions. 

Generally, it’s much easier to deal with this situation before the IRS generates the SFR. Whenever possible, file a return (even if it’s late). Don’t wait for the SFR and then try to dispute it. 

Collection Actions

What happens if you simply don’t pay the ever-increasing amount you owe the IRS? They may pursue collection actions against you. This may involve putting liens on your assets, garnishing your income, or seizing the funds in your bank account. If you do not communicate with them, they have no choice but to assume that you have no intention of paying. That’s why it’s so important to take action before the IRS sets its sights on you.

You may have heard that the IRS only has 10 years to collect tax debts. For the most part, that is true, but the 10-year statute of limitations doesn’t start until you file your return. A tax attorney can help you understand more about unfiled returns and IRS statute of limitations. 

Criminal Charges and Tax Evasion

The IRS can pursue tax evasion charges against those who willfully hide their assets or income in an effort to avoid paying their taxes. However, for that to happen, the IRS must be able to prove that you intentionally and willfully avoided paying or filing your taxes. Penalties vary, ranging from prison sentences as long as five years to fines as high as $250,000 for individuals.

Criminal evasion charges, however, are not a concern for most people. It’s important to recognize that the IRS does not simply imprison people for not being able to afford their taxes. The goal of the IRS is to collect the taxes it’s owed, not to put people in prison simply for failing to file. With the right assistance and legal support, you may be able to work with the IRS to come up with a payment plan that accommodates your current situation. There are numerous opportunities that filers can use to get caught up and make their payments over time. 

What If You Have Years of Unfiled Returns?

If you have years of unfiled returns, you’re likely panicked and overwhelmed by the thought of tackling them. Each year that passes will only make the potential penalties even greater, leaving you with more debt to face. Here’s some good news— usually, even if you have 10+ years of unfiled returns, the IRS only requires you to file the last six years. 

Being proactive about your situation and addressing it immediately is far better than waiting for the IRS to catch up to your unpaid taxes. However, it’s vital that you assess your situation before jumping in. Contacting the IRS without a plan will do nothing to ease your stress. 

Instead, reach out to a tax attorney with extensive experience working with situations like yours. Have all of the necessary information ready. This includes proof of your income, any forms or letters you have received from the IRS, and an explanation about how and why you fell behind. This will put your attorney in a better position to assist you.

The Voluntary Disclosure Program

In lieu of waiting for the IRS to contact you regarding your unfiled tax returns, consider the agency’s voluntary disclosure program. This allows people with undisclosed income to resolve their tax issues with the IRS directly. Note that this is not accessible to those whose income comes from illegal activities (including activities that are legal under state law but not under federal).

To qualify, you must provide the IRS with truthful, complete, and timely information. You may qualify for this program if the IRS has not yet:

• Started a civil examination or criminal investigation into your taxes.
• Received information from someone else about your non-compliance.
• Started an investigation related to your liability.
• Received information from a criminal enforcement action related to your liability.

If this option interests you, you should discuss it with a tax attorney. They can look over your financial matters, get in touch with the nearest IRS Criminal Investigation office, and begin the process.

Generally, with unfiled returns, you can just file the old returns. You don’t have to go through this process. But it depends on the situation. If you are far behind and you believe that you may owe a significant amount of money, you should consult with a tax attorney. 

Payment Options When You Owe Taxes

What happens if you get caught up on your tax returns, only to find out that you owe far more than you can pay at once? Remember that the IRS would rather collect what you owe over time than take you to court, so there are options for those who are currently unable to pay.

The IRS does offer payment plans for those who are unable to pay their taxes in full. A short-term plan requires you to pay your balance in 180 days or less and a long-term payment plan allows you to pay a set number of monthly payments. However, to qualify for a long-term payment plan, you must have filed all required returns.

Perhaps you agree that you owe the IRS money, but your financial situation leaves you unable to pay. If the IRS agrees with you after looking over your financial information, they may consider you “currently not collectible.” To be considered for currently not collectible status, you will need to provide information on your income, your living expenses, and your assets. If you have assets that can be sold to pay your taxes, they will likely require you to sell them and pay off as much as you can. While you are in currently not collectible status, penalties and interest charges will still continue accruing, but the IRS won’t pursue any other collections.

Another option to consider is an offer in compromise. If you are able to put some money toward your tax debt but cannot pay it in full, the IRS may be willing to accept a lower amount and consider the debt paid in full. A number of factors determine whether or not you qualify, including your ability to pay, your income, your assets, and your expenses. Before you can be considered for this option, you must have filed all required tax returns and made your estimated payments.

You Don’t Have to Navigate Your Tax Issues Alone

Tax problems are often an enormous source of stress for taxpayers, leading to sleepless nights and mental images of the worst possible outcome of their situation. Don’t let your fear of what could happen stop you from taking care of your unfiled taxes. The IRS offers numerous options to get back on track, pay what you owe, and lay the groundwork for a future free of tax issues. 

If you’re wondering, “What happens if I don’t file my taxes?”, let W Tax Group help. Regardless of which stage of the process you are in, we can represent you as you work to handle your back taxes. Contact our tax relief attorneys now for your free consultation—you can reach us online or call us at 877-500-4930.