What happens if you don't file your taxes?
This article was reposted from Consumer Reports, and written by Tobie Stanger. Union members who subscribe to ConsumerReports.org receive easy, online access to thousands of ratings on brand-name products and latest in consumer advice for only $22 per year. Click to get started >>
Even the most conscientious taxpayer might at some point be unable to file his or her tax return on time. If you end up in that situation, fear not—the Internal Revenue Service probably won’t file criminal charges against you. But it will make every effort to collect its due, with interest and penalties.
Reasons for not filing vary, and some of them are valid. For example, generally a single person under age 65 with less than $10,000 in gross income isn’t required to file a return. If you’re 65 or older, the cutoff is $11,500. Different rules apply if someone else claims you as a dependent.
The IRS will find you
Otherwise, the IRS will eventually catch up with you. Most earnings are reported to the IRS on forms W-2 or 1099. The IRS also gets reports on investment income, pensions, real-estate sales, and so on. The agency matches that data with tax returns to make sure you’re reporting it all. Nonfilers will have to pay tax on income that wasn’t covered by payroll withholding, overpayments from a prior year, or quarterly estimated taxes. You’ll owe interest, too, at rates in effect while the taxes were unpaid.
Penalties also might be imposed for failure to file and to pay. If you’re owed a refund but you didn’t file a return, you generally must file within three years from the date the return was due (including extensions, if you applied for any) to claim it. After that, you’ll forfeit the money.
To reduce your exposure to those expenses, your best strategy is to file all missing tax returns. If you don’t have records, call your local IRS office to ask for a transcript of your income data. In some cases, the IRS will use the income data to prepare returns for taxpayers who haven’t filed. But it won’t try to maximize tax deductions, exemptions, and credits. And it also won’t calculate your cost basis on a sale of securities. You’ll probably end up with a larger tax bill than if you prepared the returns yourself.
Once you submit the delayed returns, the IRS will calculate the interest and penalties you owe. If you don’t pay in full, the agency might impose a federal tax lien—a legal claim on your property. It also might garnish your wages and even seize your property.
So it makes sense to pay what you can and try for an installment payment plan or an “offer in compromise,” which is a settlement for less than the amount owed. The IRS will sometimes waive the penalties if you had a reasonable cause for not filing, such as a serious illness, a death in the family, or a natural disaster.
Not having the money to pay isn’t considered a reasonable cause; in such cases the IRS prefers that you file a return and work out a payment schedule. You’ll need to submit a detailed explanation along with any backup documentation (medical bills, insurance claims). Often, you’ll have to pay all back taxes and interest before the IRS will drop penalties.