What Happens If You Don’t File Your Tax Return?

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The old saying goes there are only two certainties in life: Death and Taxes.  We know we can’t cheat death, but did you ever wonder what happens if you file your tax return late? Or even worse,  you don’t file your tax return at all?  Frankly, I’m too chicken to ever find out.  Just in case you ever flirted with the idea, here’s what you face from the IRS.   If you already missed the boat,  here are some options if you missed the tax deadline.

Warning: You don’t want to mess with the IRS.  Depending on the nature of the actual return, you are either faced with paying interest or even worse, penalties.

Interest When You File Tax Return Late

Interest on underpayments or over-payments runs from the extended due date of the tax return, i.e. April 15th of any given year.  Regular interest is set by statute, but underpayment incurs a 1% premium rate, compared with the rate of interest that will be paid by the IRS on over-payments or refunds.  Basically, expect to be paying more interest in you owe money to the IRS, versus if you paid too much.  If you are owed a refund, you’ll still earn interest on the amount entitled to you, just at a lower interest rate.  It’s kind of like getting a loan from a bank versus how much they pay in their savings accounts.

Penalties When You Don’t File Tax Return

Penalties may be categorized as failure to file or failure to pay penalties which will automatically assessed by the IRS, and as an underpayment  that are related to some negligence or intentional fault of the tax payer.

The failure to file or (FTF) penalty is assessed by the IRS at a rate of 5% per month or partial month up to a 25% maximum.  The failure to pay (FTP) penalty is assessed by the IRS at a rate of 0.5% per month or partial month up to a 25% maximum.  If both the FTF and FTP penalties are assessed, the FTF penalty is reduced by the FTP penalty.

Example: A tax payer files her a return 39 days after the due date.  Along with the filing of the return she remits a check for $6,000, which is the balance of the tax owed.  Therefore the total FTS and FTP penalties are $600, computed as follows:

• FTP penalty, .5% times $6,000 times two equals $60.
• FTF penalty, 5% times 6,000 times two equals 600.
• FTP penalty penalties run concurrently minus $60.  Total penalties, FTF and FTP equal $600.

The FTF penalty of $600 is reduced by the FTP penalty of $60 making the adjusted FTS penalty $540.  Then adding the FTP penalty of $60 still due even though it reduces the FTF penalty makes up total assesed penalty of $600.  Still confused?  If so, easiest way to avoid this is to pay your taxes!

As mentioned there are also underpayment penalties owing to some fault of the tax payer.   However there are also the following penalties, listed in order of their severity.

• Criminal fraud.  This is simply tax evasion, which is illegal.  If convicted of this penalty the tax payer will be subject to heavy court determined fines, imprisonment or both (see pic below for an example).
• Civil fraud:  This is essentially tax payer fraud that does not rise to the level of criminal fraud.  If imposed,  the penalty is 75% of the portion of tax underpayment attributable to fraud.
• Negligence: This accuracy related penalty is imposed if any part of the underpayment, due to tax payer neglect, or to disregard of the tax rules and regulations without the intent to defraud.  The penalty is 20% of the portion of the underpayments attributable to the negligence.
• Frivolous Return: A frivolous return is one that emits certain information necessary to determine the tax payer’s tax liability, such as her Social Security number.  Usually, such a return is filed by a protester who is attempting to pester the IRS and make it’s job more difficult.  The penalty is $500 for each frivolous return filed.

Filing Tax Return Late Example

Let’s look at another example.  Charles filed a timely tax return but is later required to pay an additional $15,000 in tax.  This amount, 6,000, is attributable to the tax payer’s negligence.  The negligence penalty will be a 20% penalty applied to the negligent component.  Therefore, the total amount of penalty imposed on Charles is $1,200.  6,000 times 20%.

Don’t Forget The Tax Extension

If it’s getting close to the wire and you still don’t have all your tax information together, you still can file a tax extension.   The key on the extension is paying an estimated tax in the event that you owe.  If you haven’t paid any tax throughout the year, or not enough; then the same interest and penalties would apply.  If you can’t pay your taxes, you still have options.

How Do You File Taxes After It’s Too Late?

When you finally realize that you haven’t file your tax return, it’s best to file sooner than later (obviously).   You’ll want to collect all your tax documents for the years that you didn’t file.  Yes, that’s a lot of paperwork to collect, but remember that you are dealing with IRS.  The more you can find the better. If taxes seem like advanced chemistry to you, then hire a tax professional (CPA preferred) to help you through the process.  Be ready to pay some or all of the back tax that is owed.  If you can’t afford it immediately, you should be able to strike a deal with the IRS.  Remember, the IRS is not a “four letter” word.  They will work with you if you show you are willing to cooperate.

In conclusion, failing to file a tax return and pay your respective tax bill can be of serious consequence.   There are have been many high profile cases of individuals who failed to pay their appropriated tax bill.   If the big names can’t cheat the IRS, why do you think you’ll get away with it?  Just ask or man Wesley.  Morale of the story:  File your return and pay your taxes.

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