With the possible exception of trips to the dentist, filing tax returns is one of the least favorite things American adults have to do on a regular basis. Ignoring that April 15 filing deadline is an even more certain way to court disaster than ignoring dental hygiene.
Having a tax bill you’re unable to pay is a problem and there are ways to deal with it, but it’s never a good idea to not file a tax return, whether out of forgetfulness or in hopes that the Internal Revenue Service will forget you exist.
“The joke is on the people that think, ‘Oh, it’s not a big deal,’” Brian Barss, managing partner with Oxford Tax Partners in Chicago, told Debt.org. “The IRS at some point will make you a priority, and when they do, it’s going to be very painful financially.”
Got your attention? Good. Remember the First Rule of Holes: When you’re in one, stop digging. Here is what you need to know and do if you haven’t filed taxes.
Who Has to File?
Actually, not everyone. Filing a return is not required if your gross income – income from all sources before taxes – is below a certain amount. The threshold is low – $10,400 for singles under (age 65); $20,800 for married filing jointly (also under 65).
Also, there is no penalty for failing to file a return if you’re owed a refund. If you’re content letting the government keep what is rightfully yours, the IRS isn’t going to make you take your money.
That leads to the next issue.
You Haven’t Filed for Several Years and Owe Back Taxes. Now what?
Don’t panic, but don’t delay. Depending on how long it’s been since you filed and how much you think you owe, seeking professional tax advice may be necessary.
The first step is to determine how many years back does the IRS want you to go? IRS policy requires you to go back six years, but it’s possible they’ll settle for less. Call them directly to find out if they want more or less than six.
Secondly, if you owe back taxes, get ready to pay some serious “failure to file” and “failure to pay” penalties. There also is going to be interest accumulating on the unpaid amount of tax.
“It’s important to realize the IRS is the largest collection company in the world,” Barss said. “People think if they’re honest with (the IRS) and they are forthright with them, that they’re going to get a good outcome. The actual outcome is they (the IRS) are going to take whatever they can get because that’s what they do.”
Where to Get Your Records
To get transcripts online from the IRS, go to https://www.irs.gov/individuals/get-transcript. Available records include wage and income information from returns the IRS has received such as Forms W-2, 1099, 1098 and Form 5498, IRA Contribution Information.
Of course, there are many records the IRS won’t have, particularly for those who haven’t filed their returns. That’s another reason to seek professional tax assistance to help get everything you need.
Obviously, the more money that’s at stake, the more a professional’s guidance matters. The question to ask yourself: Can a professional tax advisor get me a better outcome than I can on my own?
Does the IRS Offer Payment Plans for Back Taxes?
Yes. The IRS has short-term (less than 120 days) and long-term plans, mostly involving automatic payments from your checking account or by check, money order or debit/credit card. Fees apply when paying by card.
Setup fees may be higher if you apply by phone, mail, or in-person.
What Are the Chances of Tax Debt Forgiveness?
It’s possible, but don’t count on it.
You’ve seen the commercial promises: Beleaguered taxpayer owes the IRS thousands – maybe tens of thousands! – but a tax relief business will make all but a tiny fraction of it go away. Poof! It sounds magical. Is it real?
Yes and no.
The process is what the IRS calls an “offer in compromise.” It’s based on one’s ability to pay, and the IRS has strong ideas about what taxpayers can afford.
That calculation is based on income, assets, household size and national averages of the cost of living. If you live in an extremely expensive zip code, the IRS isn’t going to cut you a break.
“Yes, it is possible to get wildly low settlements,” Barss said. “But it’s not something where if you owe taxes and don’t want to repay it, you’re going to get a settlement.”
There are other requirements for getting a settlement, starting with filing all returns one is legally required to file.
Can I Go to Jail for Not Filing Taxes?
Technically, yes. Tax law includes the possibility of a year’s imprisonment for every unfiled tax return. Realistically, no.
“Never,” Barss said. “In many, many years, I’ve never heard of that happening.”
Jail typically is reserved for those who commit tax evasion and decline opportunities to resolve their issue. But, that doesn’t let people off the hook for failure to file and pay. Far from it. The IRS has the power to empty your bank account and garnish massive amounts of what you earn.
“They’re going to take a good portion of your paycheck if you don’t address it,” Barss said. “For 99.9 percent of people to infinity, they will never, ever have to worry about prison. They’re going to be in a financial prison from a standpoint of not being able to pay their bills.”
Penalties for Not Filing Tax Returns
Not having to worry about the IRS knocking on your door should be reason enough to file on time every year, but if not, here are five equally good reasons:
- The best-case scenario is that if you’re due a refund, you’ve been loaning the government money at no interest. Why would you want that to continue?
- So, you want that refund after all? You’ve got three years to file a return and claim it. If you wait longer, kiss it goodbye.
- The IRS is so serious about late filing that the penalty for doing so is much higher (5% of unpaid taxes for every month you delay up to a 25% cap) than the penalty for filing on time but not paying (0.5% to 1% of taxes owed). Being unable to pay your taxes is a problem. Not filing in hopes that the IRS won’t notice makes it much worse. The sooner you file, the sooner the financial bleeding can stop.
- The IRS may file a return on your behalf. You might not like it. The IRS will try to contact delinquent taxpayers and remind them to file. If that is fruitless, the IRS can calculate what it thinks you owe, including penalties.
- Continuing not to pay can result in an IRS representative knocking at your door, seizing your assets and even arresting you for tax evasion.
“The IRS lies in wait, because the joke is only on the person that owes,” Barss said. “Every day, you have failure-to-file, failure-to-pay penalties. You have interest. So, that being said, the longer you wait to repay it, the more you owe them, and they have the ability to collect all of it.”So, it’s always in your best interest to pay in full as soon as you can to minimize the additional charges.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- NA. (2018, November 19) Additional Information on Payment plans. Retrieved from https://www.irs.gov/payments/payment-plans-installment-agreements#q03
- NA. ND. Who Goes to Prison for Tax Evasion? Retrieved from https://www.hrblock.com/tax-center/irs/tax-responsibilities/prision-for-tax-evasion/
- NA, ND. What Happens If You Don’t File Taxes for 10 Years or More? Retrieved from https://tax.findlaw.com/tax-problems-audits/what-happens-if-you-dont-file-taxes-for-10-years-or-more.html