Having unfiled taxes when you owe the IRS money is a very serious situation. Unfiled taxes are the quickest way to get very large tax penalties and in some serious trouble. The IRS does have the power to enforce some very harsh punishments on individuals but it is not standard practice for them to do this. The IRS will look at many different factors when deciding on the action they will take against the taxpayer. Below are descriptions of what the IRS can do and what the IRS will likely do to individuals that have not filed their taxes.
What the IRS Can Do
- Tax Felony Charge: Worst case scenario, the IRS can charge penalties up to $100,000 and can send an individual to prison for up to 5 years for unfiled taxes. This can happen if you are charged with a felony for not filing your taxes. This is a very rare occurrence and will likely only happen if there was something very deceitful that was done in order to evade taxes.
- Other Worst Case: This is more common than getting charged with a felony, but still very rare. The IRS can charge a penalty up to $25,000 for each year of unfiled taxes and can send the taxpayer to prison for 1 year for each unfiled tax return. If the IRS actually sent each person who didn’t file their tax returns to prison for one year, the US would have to increase their jails by 10,000% in order to house all the inmates. The IRS mainly sends individuals to jail to set an example, which is mainly why they go so hard after celebrities. The IRS likes to use the fear tactic on the US and they know that if they put a celebrity in jail it will get highly publicized and will help ensure people file their taxes.
What Will Likely Happen
- Common Tax Fraud Charges for Unfiled Taxes: When you have not filed your taxes with the intent of committing tax fraud, the IRS will typically triple the normal penalties for not filing your taxes. The IRS will charge 15% a month that the taxes remain unfiled and up to 75% of the total tax bill. So if the taxes remain unfiled for 5 months, 75% of the taxes owed will be charged as a penalty. The IRS typically does not go after individuals for fraud, and even if it was fraud it is difficult to prove so the IRS will normally just charge the normal civil penalties which are below.
- Common Civil Tax Penalties: The most likely scenario the IRS will charge the standard failure to file penalty. The failure to file penalty is 5% a month, which can reach up to 25% of the total tax bill. So if the taxes remain unfiled for 5 months, 25% of the taxes owed will be charged as a penalty.
To top off all these penalties the IRS will also require you to pay interest on the outstanding tax liabilities that is owed. Many people get into trouble with the IRS when they realize that they cannot pay what they owe and they decide not to file. The most important thing for taxpayers to realize is that it is not considered a crime if you cannot pay your taxes, it is only considered a crime when you do not file your taxes. The IRS has an excellent, but slow, system of catching non-filers. It is always a good idea to file tax returns before the IRS sends notices, especially because of their unwritten rule to not prosecute voluntary filers. The IRS will find those taxpayers that have not filed and will charge them steep penalties. The easiest way to avoid these hefty penalties is to file a tax return each year, even if taxes cannot be paid in full.