What Happens If You Don’t File Your Taxes and What You Should Do If You Are Late

Guest Post by Michael Law

Most people understand that filing their personal tax returns by April 15 is non-negotiable. However, according to the IRS, each year around 7 million taxpayers do not file their taxes. There are specific consequences to take into account when contemplating not filing.

Key Takeaway: Understand your responsibilities.

• File your taxes as soon as possible.
• Find out if you fit the requirements for the IRS’s first-time abatement penalty waiver (FTA).
• Pay what you owe, if you can.

If you don't file at all

Beyond the issue of wondering when unfiled returns or unpaid taxes are going to catch up with you, there are some unexpected implications for not paying taxes, including

• Hampering your ability to qualify for a home loan. Since one of the lender procedures is to verify your previous years tax returns, it is impossible for the lender to verify a non-filed return. 
• Missing out on credits or refunds of taxes withheld. There were almost $1.4 billion in unclaimed tax refunds, due to 1.2 million taxpayers who did not file their 2015 tax returns. That is an average of around $1,000 in unclaimed refund per unfiled return forever lost. As there is a three-year deadline to claim the refund, once April 15, 2020 arrives, the next group of taxpayers who did not claim their refunds from 2016 are out of luck.
• Being more likely to believe the IRS phone scams about a sheriff sent to arrest you for not paying your taxes, since you know you have not filed.

For those who continually choose not to file their tax return and hence do not pay their taxes owed, the IRS can do the following:

• File a notice of a federal tax lien (a claim to your property)
• Seize your property including bank account balances
• Make you forfeit your federal or state refunds
• File charges against you for tax evasion
• Revoke your passport

If you don’t file on time

If you don't file on time, there are a number of implications that taxpayers might not be aware of:

• Difficulties qualifying for financial aid for children attending college.
• In the hurry of filing late, taxpayers may lose or miss important. information, which can for example result in overpaying due to missed deductions.
• Rushed filings can also generate errors that may lead to IRS or state notices.
• Late filing penalties and interest based on the initial balance due will build up. The taxpayer will end up owing a lot more than if they had filed and paid any owed taxes on time.

If you are reading this now, and still have not filed your taxes, here is what you should do:

1. File your taxes as soon as possible.
 
2.  If you owe taxes to the IRS, find out if you fit the requirements for the IRS’s first-time abatement penalty waiver (FTA). This waiver allows a first-time noncompliant taxpayer to request the removal of certain penalties for a single tax period. An FTA can be obtained for a failure-to-file, failure-to-pay, or failure-to-deposit penalty. To qualify, you must not have been assessed any other penalties on the same type of tax return within the past three years and must be in compliance with all filing and payment requirements.
 
3. Pay what you owe, if you can.
 
4. If you cannot pay, contact the IRS to discuss the following options:

• Short-term extension to pay
• An installment agreement
• An offer-in-compromise
• A temporary delay in collection by reporting your account is currently not collectible until you are able to pay

Note that the IRS cannot waive interest charges which accrue on unpaid tax bills.

The bottom line

If you are considering not filing your taxes because you can’t afford payment, there are better ways to address this issue than not filing.
 
If you don’t have the information you need to file or simply cannot make the April 15 deadline, be sure to file an extension ahead of April 15 to extend your time to file by six months.
 
Michael Law earned a Master’s degree in taxation from Golden Gate University and has more than 20 years of experience in accounting and tax. Currently, he works as a CPA Subject Matter Expert Manager at Canopy, leading a team to develop world-class tax software. Prior to Canopy, he served as the Vice President of Tax Operations for the Salt Lake City branch of Goldman Sachs.