It’s often said that the only unavoidable things in life are death and taxes. However, there are many people who, for one reason or another, try to avoid filing a tax return. It might be something as simple as believing that they will not owe the IRS anything, and that the cost involved in filing far outweighs any potential return they may receive. Or it can be that they have recently gotten divorced and the process has become confusing due to their change in circumstances. Or, more often than you might think, they have simply avoided paying their taxes for a few years and feel they can avoid liability by simply continuing to not file. Whatever the reason, it’s important to remember that the consequences for not filing your taxes can be quite dire.
In this article, we will look at some of these consequences, starting with:
Failure to File Penalty
In case you weren’t aware, the Internal Revenue Service has the ability to impose fines on you for failing to file your taxes by deadline day, with further fines likely the longer you leave it. The penalty for filing late is commonly five percent of the unpaid taxes for each month that a return was late. However, the cap on this penalty is 25 percent of the unpaid taxes. The minimum amount of the penalty is the smaller of $135 or 100 percent of the tax that was not paid if you file the return more than 60 days after the original or extended due date.
Failure to Pay Penalty
Similar to how the Internal Revenue Service can impose fines for failing to file your taxes in a timely manner, they can also fine you for not paying your taxes on time. Normally, this penalty equals .5 percent of the unpaid taxes for each month after the due date. This penalty caps at 25 percent of the amount of unpaid taxes. Simply receiving an extension of time to file does not mean that you are not responsible for paying the taxes. If you receive an extension to file and pay 90 percent of the actual tax liability by the original due date, you will not face a failure to pay penalty if the rest of the balance is paid by the extension date. However, there are exceptions to this rule, namely if you do not owe taxes and are expecting a refund and simply do not file a tax return on time. Additionally, the IRS will not impose these penalties if you can show your failure to pay or file was due to reasonable cause and not due to willful neglect.
If you have been liable for taxes over the course of a few years, and you have failed to pay those taxes, the IRs will want to receive as much of the unpaid debt as possible in a single payment. Don’t forget that will also owe interest on the unpaid amount.
Not Receiving Tax Refund
You can only file tax returns for the last three years to receive a refund. This same principle does not apply if you owe taxes. Additionally, if you file a new return that would equal a refund, it can be used to offset the amount of taxes that you owe.
In extreme cases, the Internal Revenue Service has been known to recommend someone be prosecuted for tax evasion if they have not paid their taxes for a number of years (we’ve all heard the story of how it was the IRS that finally brought down Mafia boss Al Capone where the FBI and other law enforcement agencies failed.) However, this is a rare occurrence since incarcerating the offender usually results in the IRS not getting their money anyway. This is why the IRS has several mechanisms in place to allow individuals to come forward about their unpaid tax debt.
How to Pay Unpaid Taxes
We’ve talked at length during this article about the various consequences to not filing or paying your taxes. But what happens if you want to settle your debt to avoid these consequences? Well, IRS has several payment options for people who might be unable to pay all their back taxes owed in one go, including:
You may be able to enter an installment plan with the Internal Revenue Service in which you make weekly or monthly payments until the amount of back taxes is paid in full.
Offers in Compromise
The Internal Revenue Service may accept a smaller amount to settle the debt now rather than rely on using alternative enforcement measures like seizures or garnishments.
We hope the information in this article has been helpful to you. As a last piece of advice, it is always advisable to consult a tax lawyer before dealing with the IRS. Speaking of which, have you ever had to deal with tax issues? Share your experiences in the comments section below!