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What Happens If You Don't File Taxes - IRS Fees & Penalties

What Happens If You Don't File Taxes - IRS Fees & Penalties
Ines Zemelman, EA
09 December 2022

Have you ever thought about what happens if you don't file taxes?..

Maybe you’ve wondered if anything would happen as a result. After all, the IRS is a very large organization. Would anyone even notice if you failed to pay?

The following is an explanation to all the questions and concerns that apply to unfiled, unpaid and paid late taxes.

Do I Have to File a Tax Return?

This is a question often asked by expats.

There are numerous aspects that affect your tax rate, including how you make money (self-employment, wages, investments), as well as your filing status, age, and other circumstances. Most people don't need to file a tax return every year. The only time you would need to is if your income exceeds a certain amount or if you meet other specific filing requirements.

You typically don't need to file a tax return if your income is less than the standard deduction. However, even if this applies to you, you may still have to file taxes under specific conditions. You won't need to file a tax return if the following are all true for your situation:

  • You’re less than 65 years old.
  • If your income is less than the standard deduction for your filing status in 2022.
  • If you don't have any special filing circumstances (like earning $400 or more in net self-employment income).
  • You don't have an unearned income of more than $1,150 for 2022 as a child or other dependent.

You don't need to file a tax return as far as you meet all of these conditions, but even if you don't fill out all the above requirements, it might be in your best interest to file one anyway. If you had taxes withheld from your pay and earned income during the year, in order to get a refund of any excess money you're owed, you'll need to file for a tax refund. The IRS will not provide you with a refund for any overpayment of taxes automatically.

NOTE! You must file a tax return in order to claim your refund.

What Happens if I File Taxes Late?

All things considered, it's usually best to file your return as early as possible.

But, what happens if you would file your tax returns late?

If you don't file your taxes by the due date, there are consequences. The Internal Revenue Service (IRS) starts by sending you a notice to remind you of your obligation.

Even if you don't think you need to report your income on your taxes, remember that your employer or client might have. If you earned money from a W-2 job or through self-employment, generally, you should receive either a W-2 or 1099 form reporting what you made. The summons arrives in the mail, and the IRS collection process starts, meaning that they have a legitimate belief that you do owe taxes. You're legally obligated to meet with them so that your tax liability can be determined.

Should you not file for an extension or not pay by the extended deadline, the IRS will begin assessing penalties and interest on your tax liability. The penalty is 5% per month of the unpaid tax balance, up 25%. Here is how it breaks down:

  • Month 1: 5% of tax liability
  • Month 2: +5% of tax liability (after 60 days of being late, the minimum failure to file penalty is $435 or 100% of your tax liability, whichever is less)
  • Month 3: +5% of tax liability
  • Month 4: +5% of tax liability
  • Month 5: +5% of tax liability

Although the government may excuse the failure-to-file penalty in a few cases - such as natural disasters and military service - you'll generally have to pay up if you don't fall under an exemption.

NOTE! Though it's uncommon, the IRS may suggest jail time for people who don't file their taxes.

What Happens if I Pay Taxes Late?

The IRS will likely penalize you if you filed your taxes on time but didn't pay what you owed when it was due. You'll get a notice of the penalty in the mail.

If you don't pay your taxes on time, the resulting penalty will be based upon how long your overdue taxes go unpaid. It's a lot less expensive to simply not pay at all rather than face the 0.5% of unpaid taxes per month (or any part thereof) that you'll owe as a result of failing to file on time.

REMEMBER! The IRS also won't charge more than 25% in penalties for your unpaid taxes.

The IRS will reduce the Failure to File Penalty by the amount of the Failure to Pay Penalty if you get both fines in one month. To illustrate, let's say you didn't file or pay taxes for an entire month. In that case, the 5% Failure to File penalty would be reduced by 0.5%, which means a 4.5% net penalty would apply.

If you failed to pay your taxes on time but filed an individual tax return and have an approved payment plan, the IRS will be more lenient. In this case, the Failure to Pay Penalty is decreased to 0.25% per month (or partial month) while you're paying off under your approved payment plan.

If you refuse to pay your taxes 10 days after receiving a notice of an IRS levy, the Failure to Pay Penalty will be 1% monthly or per partial month. Even if you pay your taxes in full before the end of the month, the IRS will still charge you the full amount for that month's penalties.

If you don't pay your bill within 60 days, in addition to the taxes you already owe, the minimum late fee will be $435, or 100% of the tax required to be shown on the return. You may be able to get the penalty removed if you file your taxes on time or pay your owed taxes. This is called abatement and can be done by calling or writing to the IRS.

NOTE! The IRS usually only approves first-time requests for missing deadlines under the First Time Penalty Abatement Policy.

What Happens if I Don’t Pay Taxes: Consequences & Penalties

The United States government is much more forgiving of people who fail to pay their taxes than those who fail to file. In general, filing shows that you are being honest with the IRS. Failure to file may be seen as an attempt to trick them and could lead to criminal charges.

However, you might fail to file because you do not have the money to pay, which is a mistake. The IRS offers extensions and solutions that will help you in paying your back taxes. This means even if you don't have any resources at the moment, you must still file a tax return.

The IRS is less likely to enforce penalties on people unless they are tax-evading millionaires, but - NOTE! - not filing can still result in costly fines (up to $25,000) and a year in prison for each unfiled year. In essence, you're better off filing a return just to be on the safe side.

(to sum up all the above) Should you not file or pay taxes, here's what you can expect will happen:

1. You'll get a summons from the IRS

If you somehow forget or neglect to file a tax return, the IRS may eventually come knocking on your door. The IRS will send a summons to the last address that you filed from or the one you requested the documents from. The summons will ask for more information regarding why you haven't filed and list out any necessary forms or paperwork needed to complete your filing.

2. You'll owe late payment penalties

The IRS knows where to hit you where it hurts - your wallet. Once you file, the IRS will charge a Failure to File penalty of 5% per month (or partial month) on your unpaid taxes. This penalty is capped at 25%.

The IRS might also charge a Failure to Pay penalty, which is 0.5% per month (or partial month) of unpaid taxes until the taxes are paid in full. After 60 days, you'll owe a minimum late fee of $435 (or 100% of the tax required to be shown on the return).

3. You'll pay interest

The IRS will also charge interest on late payments. If you don't pay your taxes on time, the IRS will charge you a penalty interest of 0.5% per month. The amount of interest you owe is determined by the federal short-term rate plus 3%.

4. You'll lose your state tax refund

The IRS has a State Income Tax Levy Program (SITLP), which may seize your state tax refund to offset any federal taxes you owe. The state will notify you of the levy, and after the IRS takes the funds, you will have a chance to appeal.

5. Your federal payments might be affected

The IRS could also potentially enact the Federal Payment Levy Program (FPLP). This allows for a continuous levy on certain federal payments to collect any taxes owed. These are a few of the payments that could possibly be levied under the program:

  • Federal employee retirement annuities
  • Federal payments
  • Travel advancements
  • Social Security benefits

Bonus - What If I Can’t Afford To Pay Taxes Now?

The IRS provides an Online Payment Agreement tool on its website that allows taxpayers to set up a payment plan if they cannot pay their taxes in full at the moment. The payment options available to you are determined by your specific tax situation and can include full payment, a short-term 180-day or less payment plan, or long-term monthly installment payments.

The IRS Direct Pay portal offers the benefit of no setup fee if you pay upfront, as well as dodging future penalties and interest that would be added to your balance. If you choose the short-term payment plan instead, there is still no setup fee; however, (!) you will accrue penalties and interest until the balance is paid off.

If you choose to enroll in a long-term payment plan that automatically withdraws from your checking account, you'll pay $31. However, if you meet the requirements for low income, the IRS will waive the fee. Like the short-term payment plan, penalties and interest will accrue until the balance is paid off entirely.

A $130 installment agreement setup fee is applied if you choose non-direct debit. If an existing payment plan needs to be revised or reinstated after default, a $10 fee will also be charged.

FAQ

1. Should I file taxes even if I don’t have to?

Yes, if you earned income during the tax year and you meet the filing requirements for your location or country, then it is important to file. The penalties for not filing can be much more severe than any taxes owed. If you have taxes withheld from your paycheck, the ONLY way to get a refund for overpayment is by filing a tax return.

2. What is the 90% Rule?

You will not incur any IRS penalties as long as you have paid either 80% or 90% of your balance due through check withholdings, quarterly estimated tax payments, or a combination of the two by Tax Day.

3. What’s the worst that can happen?

If you don't file your taxes or request an extension, the penalties will be up to 25% of what you owe. So, if you think you might owe $5,000 in taxes, the penalty could be as high as $1,250.

The penalty for not filing your taxes on time is two times your tax bill, but if you ignore the IRS altogether, they could garnish your wages and place liens on your property. If you still don't file or pay them, you might even go to jail.

4. What is a Substitute Tax Return?

If you don’t file your taxes and the IRS has no record of it, they may prepare a substitute for return (SFR) for you. The SFR is based on information that the IRS has from third-party sources such as W-2s or 1099 forms. It is important to note (!) that if the IRS files an SFR for you, the penalty will be based on this return, which may not reflect any deductions or credits that would have been available to you if you had filed your taxes yourself.

Ines Zemelman, EA
Founder of TFX