Consequences of Not Filing a Tax Return

You could face penalties, loss of your tax refund, or other consequences if you fail to file a tax return. The IRS punishes a failure to file a return even more severely than a failure to pay taxes. If you are required to file, you should file your tax return even if you can’t afford to pay your taxes right away. You also need to file a return to receive your tax refund.

Consequences When You Don’t Owe Additional Tax

You won’t receive a tax refund unless you file your return. You will not have to pay a late filing penalty if you don’t owe additional tax, but you should still file to get your refund and to avoid having the IRS file a substitute return on your behalf.

Loss of Refund

You need to file a tax return if you want to receive your refund. You have three years to claim your refund. After that, you forever waive your right to collect that money.

If you are eligible for a refundable tax credit and don’t claim it, you miss your chance to receive that money. You aren’t allowed to make up for missed credits by claiming them on future tax returns.

The IRS also won’t pay you any interest on the refund amounts they are holding for you. When you delay filing your tax return, you are giving the IRS an extended interest-free loan.

Ineligible for Offer in Compromise

An IRS Offer in Compromise (OIC) is a program that allows taxpayers to settle their taxes for less than the amount they owe. The IRS may accept these offers when they are greater than or equal to the reasonable collection potential of the taxpayer’s liability.

You won’t be eligible for an OIC if you have not filed all required tax returns. If you submit an OIC without filing all past due returns, the IRS will return your application without consideration and keep any initial payment you sent.

Consequences When You Owe Additional Tax

The IRS will charge you penalties and interest if you fail to file when you owe additional tax. The IRS could file a substitute return for you that gives you a higher tax bill than you would get if you filed voluntarily. If you don’t file and don’t pay your taxes, the IRS could initiate the collection enforcement process.

Substitute Return

If you have a filing requirement and fail to file, the IRS may file a substitute return on your behalf. They can use information from your W-2 and other tax forms to create a return for you.

This return may not reflect all of your deductions or credits. The IRS could believe that you owe them additional tax, even if you would receive a refund if your return had all of your information. You can avoid this by filing on time even when you don’t owe any additional tax.

Penalties for Failure to File

You will receive two different penalties if you fail to file when you owe taxes for the year:

• The failure to file penalty, which is 5 percent of your unpaid tax liability each month. The maximum penalty is 25 percent of the unpaid tax.
• The failure to pay penalty, which is .5 percent of the unpaid tax liability each month. The maximum of this penalty is 25 percent of the unpaid tax.

You can see that the failure to file penalty is much harsher than the failure to pay penalty. This is why you are better off filing your return on time, even when you can’t pay your tax bill right away.

In addition to these penalties, interest will accrue on your unpaid tax balance. The interest rates vary, and the IRS publishes each quarter, but they have recently been around 3 or 4 percent.

Enforced Collection Actions

Once the IRS assesses tax against you, they will demand payment. When you don’t pay by their deadline, they can start taking collection enforcement actions.

The IRS may attempt to collect taxes by taking the following actions:

• Tax lien – The IRS tax lien automatically applies to all of your real and personal property after the IRS demand payment, and you fail to respond in time. This lien can hurt your credit and make it difficult to sell or refinance your property.
• Bank account levy – The IRS can seize your bank account funds as payment for your taxes owed. Your bank has to comply with the levy if the IRS follows the proper procedures.
• Wage garnishment – The IRS may require your employer to send a portion of your wages directly to them. Garnishment can take the majority of your wages depending on your filing status and amount of exemptions. If you receive a bonus or commission check, the IRS can take 100 percent of it.

You can avoid most of these collection actions by negotiating an installment agreement, Offer in Compromise, or another type of tax resolution with the IRS.

The Statute of Limitations on Tax Assessment Never Starts

The IRS generally has three years to assess tax. This statute of limitations begins on the date the return is due or the date it is filed, whichever comes later. If you never file, the IRS has unlimited time to audit your return and assess tax against you.

Possibly Go to Jail for Not Filing Taxes

The IRS does consider it a crime to evade tax by not allowing the assessment of tax and then not paying the taxes that would be owed. A taxpayer can be sentenced to up to 5 years in prison and up to $250,000 in penalties. These penalties can even be higher if you commit fraud. Being sentenced to jail is rare and it is only a possibility if you purposefully evade taxes by not filing.

Consequences When You Aren’t Required to File

Even if you are not required to file a tax return, you should still file if you will receive a refund. If you are eligible for a refundable tax credit or had taxes withheld from your paycheck, you have to file a tax return to receive your tax refund.

Loss of Refund If Taxes Were Withheld from Your Pay

In our “pay-as-you-go” tax system, you are required to send tax money to the IRS as you earn it. If you are an employee, your employer will withhold amounts from your pay and send them to the IRS throughout the year.

You must file a tax return to get this money back, even if you aren’t otherwise required to file a return. You may also want to adjust your W-4 form so that your employer doesn’t withhold as much in the future.

Won’t be able to Receive the Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a refundable credit for low and middle-income taxpayers. Like other refundable credits, you can receive a refund from the EITC even if you don’t owe any tax for the year.

If you are eligible, you must file a return to receive the EITC. The maximum credit amount is $6,318 for the 2017 tax year.

You Must File to Receive the American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a partially refundable tax credit. If the credit reduces your tax liability to zero, you can receive 40 percent of the remaining credit as a refund, up to a maximum refundable amount of $1,000.

You must be pursuing a degree or recognized credential and meet other requirements to claim the AOTC. Ask a tax professional if you aren’t sure if you qualify.

You Must File to Receive the Additional Child Tax Credit

The Additional Child Tax Credit is a refundable credit available to taxpayers who can’t claim the full amount of the Child Tax Credit. You may be eligible for this credit if you have children under the age of 17, but you must file to receive this credit.

For tax years after 2017, the Child Tax Credit has been expanded. The maximum refundable amount of the credit will be $1,400 per qualify child for the 2018 tax year.

You Must File to Receive the Health Coverage Tax Credit

The Health Coverage Tax Credit (HCTC) pays a portion of health insurance premiums for eligible individuals and their families. You must be on the following to qualify for the HCTC:

• Trade adjustment assistance (TAA) recipients
• Alternative TAA recipients
• Reemployment TAA recipients
• Pension Benefit Guaranty Corporation payees
• A qualifying family member of one of the above

Consult with a tax professional to determine if you qualify for the HCTC.

What to Do If You Have Unfiled Tax Returns

If the IRS owes you a refund for not filing taxes in the past three years, you may still have a chance to receive your money. If you owe tax for an unfiled return, you may need to file your previous year returns before submitting an Offer in Compromise. You may also be able to receive first-time penalty abatement or negotiate a payment plan. Consult a tax professional for help with back taxes and unfiled tax returns.