Unfiled tax returns can result in severe consequences, as the IRS requires all taxpayers to file their annual income tax returns by the filing deadline. Failing to file a required return can lead to penalties, interest, and aggressive collection actions by the IRS, including substitute returns, liens, and levies.
Consequences of unfiled tax returns include:
- Failure to File Penalty: This penalty is typically 5% of the unpaid taxes per month, up to a maximum of 25%.
- Failure to Pay Penalty: This additional penalty is assessed on the unpaid taxes if the return is not filed and the tax is not paid.
- Substitute for Return (SFR): If a taxpayer fails to file a return, the IRS may file a substitute return on their behalf. The SFR is based on income information the IRS has from third parties (W-2s, 1099s, etc.) and does not include any deductions or credits the taxpayer may have been eligible for, leading to a higher tax liability.
- Tax Liens and Levies: The IRS can file a Notice of Federal Tax Lien to secure its interest in the taxpayer’s property, or issue a levy to seize assets, such as bank accounts or wages.
Taxpayers with unfiled returns should act quickly to avoid further penalties and enforcement actions. Filing the missing returns, even if late, can help reduce penalties and prevent additional collection actions. If the taxpayer is unable to pay the full tax liability, they may be eligible for a payment plan or an Offer in Compromise.
It’s important to work with a tax professional to resolve unfiled returns and minimize the financial and legal risks associated with non-compliance.