Why Filing Your Taxes on Time Matters
It’s easy to put off filing your taxes. Life gets busy, the forms look confusing, and it’s tempting to just ignore it. But, ignoring your taxes can come with some significant downsides. Think of it like ignoring a bill – it doesn’t go away, and it usually gets worse over time. The IRS expects everyone to file their taxes on time, and there are consequences for failing to do so.
What Happens When You Don’t File?
The main problem with not filing your taxes on time is that the IRS will start to assess penalties. These penalties are like fines, and they will keep adding up until you file.
Failure-to-File Penalties
The IRS charges a “failure-to-file” penalty, and this penalty is hefty. It’s calculated as a percentage of the taxes you owe, and for each month or part of a month that you are late, you’ll owe more money. Here’s how it generally works:
- Percentage: The penalty is usually 5% of the unpaid taxes for each month or part of a month that your return is late.
- Maximum: The maximum penalty is 25% of the unpaid taxes.
- Minimum: if you are more than 60 days late, the minimum penalty is usually the lesser of $485 (for 2024) or 100% of the unpaid taxes.
- No Penalty if No Tax is Due: You won’t be penalized if you don’t owe any taxes. But you still have to file your return.
Example: Let’s say you owe $1,000 in taxes, and you’re three months late in filing. You might face a failure-to-file penalty of 15% (5% per month for 3 months) , or $150, not including any additional interest.
Failure-to-Pay Penalties
In addition to the failure-to-file penalty, you’ll likely face another penalty if you owe taxes and don’t pay them on time. This is the “failure-to-pay” penalty.
- Percentage: It’s usually 0.5% of the unpaid amount for each month or part of a month that your taxes remain unpaid.
- Maximum: The maximum penalty is 25% of the unpaid taxes.
- Relationship with the Failure-to-File Penalty: It is important to note that the failure to pay penalty is reduced by the failure to file penalty amount. Thus, the combined penalty amount from these two penalties can’t be more than 5% for any month or part of a month it is late.
Example: Using the same example, even if you file three months late and owe $1,000 in taxes, you could face a failure-to-pay penalty of 1.5% (0.5% per month for 3 months) on top of the failure-to-file penalty and any interest you will accrue.
Interest on Unpaid Taxes
Penalties aren’t the only financial hit you’ll take for not filing or not paying on time. You’ll also be charged interest on the unpaid amount, and the interest rate can change over time.
- Compounding Interest: The interest is compounded daily and that means it is calculated on the unpaid tax plus any previously accrued interest.
- Interest Rate: The interest rate varies, but it is usually several percentage points above the federal short-term rate.
Interest can add up quickly, and it will continue to accrue until you pay the full amount you owe. This makes it even more costly to delay filing.
The IRS Might File a Substitute Return for You
If you don’t file your tax return, the IRS has the option to file a “substitute for return (SFR)” for you. This means that they will estimate your income and tax liability, based on the information they have, such as your W-2 and 1099 forms.
Why is an SFR bad?
- No Deductions or Credits: The IRS is not trying to help you when they file your taxes. They won’t use tax credits or deductions that you might be eligible for. This typically means you will owe more in taxes than if you had filed on your own.
- Missed Opportunities: The IRS is not trying to help you when they file an SFR for you. They will not account for any other factors such as credits, deductions, or losses you may have.
- Collection Process: Once they file an SFR for you, they can pursue collections for this amount, just as if you had filed the return yourself. This can lead to wage garnishment and bank levies if you fail to respond.
It’s always better to file your taxes yourself than to let the IRS file a substitute return for you.
Potential Legal Action
In severe cases, failing to file your tax returns can lead to more serious consequences than just penalties and interest. The IRS can take legal action against taxpayers, this is usually when you fail to respond to the letters you get from the IRS after failing to file your returns. Legal actions can include:
- Criminal Charges: In some instances, usually when you purposefully avoid filing your taxes or commit tax fraud, the IRS can bring criminal charges against you.
- Liens: The IRS can place a lien on your property or assets if you owe back taxes. Liens can impact your credit and ability to sell that property.
- Levies: The IRS can levy your bank accounts and garnish your wages to collect unpaid taxes.
Who is Affected by These Consequences?
Anyone who is legally required to file a tax return is affected by these consequences. This includes:
- Individuals: Most individuals who earn above a certain threshold each year are required to file tax returns.
- Businesses: All businesses must file a tax return, regardless of the income they earned.
- Self-Employed Individuals: Self-employed individuals must file a tax return and pay self-employment taxes, as well.
- Estates and Trusts: Estates and trusts also have tax filing obligations.
Related Concepts and Terms
Understanding these related concepts can help you better navigate the world of taxes:
- Tax Audit: The IRS might audit your return if you have not filed or after you have filed your return if there seems to be issues.
- Tax Evasion: The act of not paying or purposefully avoiding paying taxes, which can lead to criminal charges and penalties.
- Tax Lien: Legal claim the IRS places on your property due to unpaid taxes.
- Tax Levy: The IRS legally taking assets to satisfy unpaid taxes.
Tips for Avoiding Unfiled Tax Returns Consequences
- File on Time: The best way to avoid any penalties or interest is to file your tax return on time, even if you can’t pay.
- Request an Extension: If you need more time to file, request an automatic extension to extend the filing deadline for 6 months. Remember that this only applies to filing and does not extend the payment deadline, so you still need to estimate your tax and pay that amount.
- Pay What You Can: Even if you can’t pay your taxes in full, pay what you can. You will still be charged interest and penalties, but you can avoid larger penalties by paying what you can.
- Consider Professional Help: If you’re overwhelmed by taxes, consult with a tax professional. They can help you file accurately and on time. They can also advise you on how to pay your taxes if you are unable to pay what you owe.
- Don’t Ignore IRS Notices: If you get a notice from the IRS, read it carefully. Respond to it and address any issues promptly. Ignoring notices only worsens the situation and can increase the consequences of your unfiled return.
- Set Reminders: Put tax filing deadlines on your calendar, so you do not forget.
Common Mistakes and Misconceptions
- Myth: You don’t have to file if you can’t pay. This is incorrect. You should always file your taxes even if you can’t pay. You can work with the IRS on a payment plan and avoid more penalties.
- Myth: The IRS won’t know if you don’t file. The IRS receives copies of your W-2s, 1099s, and other tax documents. They will know if you don’t file.
- Myth: Not filing a tax return will make tax problems go away. It won’t. Ignoring your taxes will only lead to bigger problems with the IRS.
Takeaway
Not filing your tax return is a serious issue with real consequences. The penalties, interest, and potential legal action can be financially and emotionally devastating. It’s always best to file your taxes accurately and on time, even if it’s challenging. If you’re struggling with unfiled tax returns, don’t hesitate to reach out to a tax professional for assistance. They can help you catch up, resolve any issues with the IRS, and guide you on staying compliant in the future.