What Happens if You Don’t File Your Tax Return?

Did you forget to file your tax return? Did you not know you needed to file a tax return? Were you trying to evade taxes? Find out what will happen to you.

What happens if I forgot to file my tax return?

It may seem implausible that someone forgot to file their taxes, but it happens. About 7 million people fail to file their tax return each year.

Something big happens in your life, your tax return slips your mind, and suddenly it’s a year later when you remember you never filed. If you forgot to file your taxes, here’s what will happen and what you should do.

What if I forgot to file and the IRS owes me a refund?

If you’re owed a refund, you’re in luck. Your taxes were completely paid through withholding or estimated tax payments. This means you won’t owe interest or penalties.

To get your refund, you’ll need to file your return just as you would have if you filed on time. You have up to three years from the original due date of your return, or you’ll forfeit your refund.

What if I forgot to file and I owe the IRS?

If you owe the IRS money, you have a problem. First, there are failing to file and failing to pay penalties that could be as high as 25% of the taxes you owed depending on how late you filed. Second, interest will accrue on your balance until it’s paid. Third, you may have to convince the IRS that you weren’t trying to evade taxes.

You should also know that there is no statute of limitations for failing to file a tax return. If you just realized you didn’t file a couple of years ago, you can’t run out the clock in the hope of not having to pay the taxes you owe.

The only way to stop interest and penalties from accruing is to file a return and pay your balance as soon as possible.

Can I just wait until I get A notice from the IRS?

Waiting until you receive a notice from the IRS is the worst thing you can do. Interest and penalties will accrue until you pay your tax liability in full. If the IRS believes you knew you had additional income but didn’t report it, you may be subject to additional civil penalties or criminal tax evasion charges.

Further, the IRS’s chances of finding out you didn’t file are almost 100%. If you got just one W-2, 1099, or other information return, the IRS computers might flag your account when they can’t find your return.

In short, you need to file your return as soon as possible.

Can the IRS owe you money if you never filed a tax return?

If you’ve never filed a tax return, you might be expecting the IRS to come after you. Failing to file your tax return is a bad thing, but it might not be for the reasons you’re expecting. You might have already let the IRS keep too much of your money.

How can the IRS owe you money if you never filed a tax return?

For most people, you don’t actually pay taxes when you file your tax return. You pay taxes throughout the year, then your tax return is just to check that you paid the right amount.

What do you mean you pay taxes throughout the year?

If you’re an employee, your employer automatically takes your taxes out of your paycheck and sends them to the IRS. A good chunk of that tax withholding goes to your federal income taxes. When you file your federal income tax return, you should have already paid most, if not all, of your federal income tax bill.

Why would the IRS owe you money?

Income tax withholding is just an estimate. You should have filled out a W-4 with your other paperwork to tell your employer how much to withhold when you got hired. However, variations in your pay and life situation mean your tax withholding rarely matches your tax bill to the exact cent. It’s possible you could pay too much in withholding during the year, and you’re entitled to get that money back. You may also have gotten a refundable tax credit such as the Earned Income Tax Credit, Child Tax Credit, or American Opportunity Tax Credit.

How do you get your money back from the IRS?

You get your money back from the IRS by filing an income tax return. When your return shows that you paid too much in taxes during the year, the IRS will send you a refund. You can get a check mailed to you, set up a direct deposit, apply the refund towards next year’s taxes, or use it to buy savings bonds.

How long do you have to get a tax refund?

Ideally, you want to file your tax return on time. That means filing your tax return for the prior calendar year by April 15th each year.

If you don’t file on time, you have up to three years to file and request a refund. If you don’t file for your refund by the deadline, the IRS gets to keep your money.

What are the penalties if you don’t file your tax return or pay your taxes?

There are three categories of IRS penalties — not filing your tax returns, not paying your taxes, and not reporting your information accurately. If you don’t file your tax return, you could have to pay double penalties since you trigger both the failure to file penalty and the failure to pay penalty.

Late Filing/Failing to File

If you fail to file your tax return by the deadline, a penalty of 5% of the unpaid tax applies for each month or part of a month until you pay. The maximum penalty for failing to file is 25%. After five months, failing to pay penalties and interest still applies, but the failure to file penalty is capped. If you file more than 60 days late, the minimum failure to file penalty is the smaller of $205 or 100% of your unpaid taxes.

The penalty does not apply to any portion of the tax due that you paid through withholdings, estimated taxes, or other deposits.

This penalty may also apply when the IRS adjusts your balance due and you fail to pay by the due date on the notice.

Example: A W-2 wage earner who had $20,000 in taxes due and only $10,000 in withholding and filed…

  • One month late: $500 failing to file penalty ($10,000 owed x 5%).
  • Two months late: Additional $500 for $1,000 total.
  • Three months late: Additional $500 for $1,500 total.
  • Four months late: Additional $500 for $2,000 total.
  • Five months late: Additional $500 for $2,500 total (the taxpayer is now at the 25% cap).
  • Six+ months late: No additional failing to file penalty. Interest and failing to pay penalties still apply.

Always file your tax return on time (or file for an extension) even if you can’t pay because the failing to file penalty is substantially larger than the failing to pay penalty.

Failing to Pay on Time

If you fail to pay your taxes when due, the IRS adds a penalty of 0.5% of your unpaid tax debt for each month or part of a month that the balance remains unpaid. The total failing to pay on time penalty cannot exceed 25%.

Exceptions:

  • If you’re also assessed failing to file penalties in a month, the maximum combined penalty is 5% (0.5% failing to pay + 4.5% failing to file).
  • When you’re making automatic payments on an installment agreement, the failing to pay penalty is reduced to 0.25% per month.
  • If the IRS issues a final notice of intent to levy or seize property, the failing to pay penalty increases to 1% per month beginning 10 days after the date of the notice.

Example: Continuing the example from failing to file…

  • Months 1-5: The penalty is capped at 5% combined, so the total penalty remains $500.
  • Months 6+ (or sooner if the taxpayer files sooner): The failing to pay penalty is 0.5% x $10,000 owed = $50 per month.
  • If the taxpayer goes on an installment agreement, the penalty is reduced to $25 per month* (0.25% failing to pay x $10,000).
  • If the IRS issues a notice of intent to levy, the penalty is increased to $100 per month* (1% of $10,000).

* As you pay your balance down, the penalty decreases because it’s based on what you currently owe not the original balance.

The maximum total combined penalty for failing to file and failing to is 47.5% rather than 50%. This is because the 5% monthly cap on combined penalties effectively waives 0.5% of the late filing penalty in the first 5 months or 2.5% total.

In some situations, you may be able to have penalties reduced or removed by applying for IRS penalty relief.

Accuracy-Related Penalty

In addition to the failing to pay penalties, an accuracy-related penalty may also be assessed in certain situations. These include:

  • Negligence.
  • Disregard of tax rules and regulations.
  • Substantial understatement.

The penalty is 20% of the additional tax owed.

Negligence

Negligence means failing to make a reasonable attempt to properly complete your tax return. It also includes failing to make a reasonable attempt to keep adequate books and records to complete your return or to back up your return.

This is a gray area but it does not include all errors. It depends on whether there was reasonable cause for the error, the complexity of the issue, and your level of knowledge.

Disregard

Disregard means that you ignored provisions of the tax code when completing your return. This includes both acts that are similar to negligence and intentional oversights in an effort to avoid paying taxes.

Substantial Understatement

Substantial understatement means the taxes you reported on your return are far less than what you actually owe. An understatement is substantial if it exceeds the greater of:

  • 10% of the total tax required to be shown on the tax return in question.
  • $5,000.

Interest

Interest is charged in addition to any penalties at a rate of the short-term federal funds rate plus 3%. There is no cap on interest.

Failing to Pay Estimated Taxes

The estimated tax penalty applies to taxpayers who owe too much at the end of the year because they had inadequate withholding, estimated tax payments, or other deposits. You can calculate the penalty on Form 2210, and the current rate is about 4% of the shortfall.

Most taxpayers can avoid estimated tax penalties by paying the smaller of 100% of their previous year’s totaltax liability (not just what they owed when filing) or 90% of the current year’s. Higher-income taxpayers may need to pay 110% of the previous year or 100% of the current year. Special rules apply to certain industries, such as fishermen and farmers.

The estimated tax penalty is called a penalty but acts more like interest. If you file and pay by your tax return due date, your return and payment are on time. However, failing to pay estimated taxes on time is a default on an installment agreement.

Failing to Deposit Withholding Taxes

The IRS penalties for failing to deposit payroll taxes you withheld from your employees’ paychecks are severe. The first penalty is a late penalty of:

  • 2% if 1-5 days late.
  • 5% if 6 to 15 days late.
  • 10% if 16+ days late.

In addition, the business owners or other responsible parties are personally liable for 100% of any deposit shortfall. This applies even if the business is a corporation or other entity that would otherwise provide protection from personal liability for business debts.

Because payroll tax withholdings come out of your employees’ paychecks rather than from business assets, the IRS considers failing to make payroll tax deposits as essentially theft from your employees. The IRS may pursue additional civil penalties or criminal prosecution against anyone who fails to make the required deposits.

Failing to Provide an Information Return (W-2, 1099, etc.)

If you do not provide a W-2 or 1099-NEC to your employees or independent contractors by January 31st, per return penalties apply.

  • 1-30 days late: $50.
  • 31 days late to August 1st: $100.
  • After August 1st: $260.
  • Intentional disregard: $530.

Example: You provided W-2s for 10 employees 15 days late. The penalty is $50 x 10 = $500.

Different deadlines and penalties apply to other types of information returns, but the overall concept is the same.

Failing to Report Foreign Assets and Income

U.S. citizens must report most foreign earned income. You also must report your ownership of many types of foreign assets, such as bank accounts or foreign stocks. (This does not include international stock funds traded on a U.S. stock market.)

Penalties vary based on the type of income or asset as well as the purpose of the transaction. For example, a tax shelter versus a frequently traveler keeping spending cash at a foreign bank. In some cases, criminal prosecution may result.

Tax Evasion/Fraud

Tax evasion or other types of fraud potentially carry both civil and criminal consequences. The civil penalty is up to 75% of the unpaid tax plus any other applicable penalties and interest. The criminal penalty is up to $100,000 ($500,000 for a corporation) plus five years in prison.

If you believe you are under investigation for tax evasion or tax fraud or may have committed tax evasion or tax fraud, you must speak to a tax lawyer, not a tax accountant. While an accountant can handle most IRS disputes, an accountant cannot represent you in court. Additionally, the IRS may force an accountant to reveal information that would be subject to attorney-client privilege if given to an attorney. If you hire an attorney first, your attorney can hire an accountant for you and maintain attorney-client privilege.

What to Do About IRS Penalties?

The first step if you’re facing IRS penalties is to determine whether you agree with them. If you do, you will need to pay the adjusted balance but may be eligible for penalty relief. If you don’t agree, ask your tax professional how to respond to the IRS notice or begin the appeals process.

How many years can you go without filing taxes?

How long you can go without filing taxes depends on what information the IRS has and what they think you owe. If you owe taxes and they know about your income, you may get a notice within just a few months. If you had more than enough taxes withheld to cover what you owe and should get a refund, the IRS may never contact you.

Some sources of income, like gambling or self-employment, are hard for the IRS to track. It may be possible to get away without filing or paying taxes for years. However, there is a good chance the IRS will find out, charge you back taxes and penalties for every year, and file criminal charges.

The only time it’s a good idea to not file a tax return is when the IRS says you don’t need to.

 

Disclaimer: This post is provided for general information only. The information may be outdated or may not fully cover the unique circumstances of your specific situation. Always consult with an appropriate professional before making important decisions.

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