Can I Get Into Trouble for Not Filing Taxes?

unfiled tax return consequences

Delinquent or Unfiled Tax Return Consequences for IRS Taxes

If you have unfiled tax returns and you owe a tax debt, there can be serious consequences. Even if you don’t owe any taxes, it may be in your best interest to still file. To help you out, this guide explains what happens if you don’t file your federal return and you have delinquent taxes. It also outlines the consequences of unfiled tax returns. Keep in mind that many states have similar consequences, and in fact, states often have the power to do a few things the IRS is unable to do for unpaid tax bills.

What to Expect If You Have Unfiled Tax Returns

If you don't file, the IRS may send you Notice CP59. This notice just says that you might need to file a return, and it comes with Form 15103 which you can fill out to prove to the IRS that you don't need to file a return. If you don't respond to CP59, the IRS will likely send you CP515 which also just states that you should probably file a tax return. If you still don't respond, you may get CP516 which has stronger wording and says you "must" file a return. Eventually, the IRS will send CP518 which says that if you don't file, the IRS will move forward and file a substitute for return to determine the tax, penalties, and interest you owe.

The IRS sends these notices to your last known address, and unless you've submitted an official address change to the agency, this will be the address on your last tax return. If you've moved and haven't filed in a while, these notices may be going to your old address. 

The substitute for return process typically happens automatically through the IRS's Automated Substitute for Return program. Once all of the above notices go out, this program creates returns for some taxpayers. Generally, it only kicks in if the unfiled tax returns are from the last five years, the IRS has received W2s or 1099s for the taxpayer, and there isn't a currently not collectible or installment plan on file for that year. The system also only creates a return if you owe over a certain amount. The IRS does not publish this number, but many people speculate that it's as low as $500. 

If the IRS generates an SFR for you, it will send Notice 2566. This states your tax debt based on the SFR plus interest and penalties At this point, you can agree with the proposed amount, or you have 30 days to file a correct return. If you ignore this notice, the IRS will probably send Letter 3219N. This Statutory Notice of Deficiency gives you 90 days to file a correct return or file a petition with the U.S. Tax Court. Filing a Tax Court petition will stop the SFR from becoming final until the Court makes a decision. But if you ignore this notice, the tax assessment from the SFR becomes final.

Consequences of Unfiled Tax Returns

There are many financial and tax-related consequences of unfiled tax returns. For instance, if you're self-employed, you won't get credit for your earnings in the Social Security and Medicare system, and you could end up not qualifying for Medicare or getting very low Social Security payments or nothing at all. Here are other consequences of unfiled tax returns. 

Penalties

If you fail to file a federal return by the due date, you face a failure-to-file penalty. That’s 5% of the balance for every month you don’t file. This penalty maxes out at 25%. If you file at least 60 days late, your minimum penalty is the lesser of $205 or 100% of your tax owed. If you don’t owe any tax, these penalties don’t apply, but you can face other issues.

Here's an example. Imagine that you owe $1,000. Your late fee will be $50 -- that's 5% of the tax liability. The IRS will assess this penalty every month until it reaches 25% of your balance. In this case, that is $250. The more you owe, the higher the penalty for the unfiled return will be. In addition to the penalty for not filing, you will also incur interest on the tax balance and penalties.  

No Refund

If you are due a refund, but you don’t file, you will not get the refund. Tax refunds can be a valuable amount of money for many families. As of 2022, the average federal tax refund is just over $3,000. But if you don't file, the government won't know that you are due a refund. You have three years to file your federal return, but after that, you lose the opportunity to claim your refund. Most states have a similar time limit for claiming state tax refunds. Unfortunately, however, the reverse is not true. The IRS and the states can take a much longer amount of time to go after you if you owe a tax debt due to unfiled tax returns.  

No Losses Can Be Carried

When you have business or investment losses, the IRS allows you to carry forward those losses to offset future years’ earnings. However, if you fail to file, you cannot carry losses forward from that year.

To explain, imagine that you run a small business. You spend more on expenses than you collect in revenue. As a result, you have a loss. If you don't have any other filing requirements, you don't have to file a federal income tax return. However, if you want to use that loss next year, you need to file. 

Say that you lost $10,000 in tax year 2021. So, you file a tax return and you show the loss on your Schedule C. Then, in tax year 2022, your business earns $60,000 in profits. When you file your 2022 return, you note the loss as well as the other information about your 2022 business taxes. That lowers your profits to $50,000, and in turn, that lowers your tax bill. That would not have been possible if you didn't file your tax return. 

 

Potential Loss of Tax Credits

If you qualify for a tax credit like the Earned Income Tax Credit (EITC), you have to file taxes to claim it. That is a refundable credit that puts money in your pocket. If you don’t file, you lose the tax credit.

There are many different tax credits including credits for children, daycare costs, and college expenses. 

Substitute for Return Consequences

In some cases, when you have unfiled tax returns, the IRS automatically completes a substitute federal return (SFR) for you. This return contains information from W2s, 1099s, or other forms the IRS has received from your employer, your bank, or other entities. Typically, the SFR only has one exemption, no dependents, and the standard deduction. The IRS also uses single or married filing separately as the filing statuses. For most people, this leads to a higher-than-necessary tax liability. If this happens, you should contact a tax professional.

Citizenship Consequences

Unfiled tax returns won't affect your citizenship if you're already a citizen, but if you're applying for citizenship, not filing can hurt you. You need to show strong moral character when you go through the immigration and naturalization process, and failure to file tax returns as required can lead to failure.  

Statute of Limitations to Audit Never Begins

When you file your tax return, the IRS has three years to audit it. After that point, the statute of limitations kicks in, and the agency can’t audit that return. However, if the IRS generates an SFR for you, that can be audited at any time. Again, if you file, you avoid the SFR. Additionally, there is no statute of limitations for the IRS to audit your return if you haven't filed one. In most cases, the agency doesn't go back further than six years when dealing with unfiled tax returns. However, it has the right to look back for an unlimited amount of time. There is no IRS statute of limitations on unfiled tax returns. By not filing, you expose yourself to greater risk if the IRS ever decides to review your situation.

You May Not Qualify to Include Taxes in a Bankruptcy

To qualify for both Chapter 7 and Chapter 13 bankruptcy, you need to be current on your tax filing obligations. In most cases, you must have filed the last two years of returns for Chapter 7 and the last four years of returns for Chapter 13. If you have unfiled tax returns, you may not be able to declare bankruptcy. Typically, you can pay someone to catch up on your infiled tax returns for you, but this delays the bankruptcy process and makes it cost more. 

Incarceration

Jail time is rare but possible for unfiled tax returns. Under federal law, you can face up to a year in jail and up to $25,000 in fines for not filing your return. The penalties are even stricter if you commit fraud. However, you cannot go to jail just for owing a tax debt. You can only go to jail for not filing, tax fraud, or for purposefully evading taxes

Loan Complications

If you have unfiled tax returns, loans are much more difficult to obtain. Generally, when you apply for a mortgage, personal loan, business loan, or a loan for higher education, financial institutions will want to see copies of filed tax returns. Lenders use this information to verify your income. In some cases, lenders may even request a tax return if you apply for a car loan or a credit card. 

Serious Collection Activity

If you don’t file and you owe money, the IRS could start some serious collection activities. That may include the following:

  • Tax Liens

    This is when the IRS files a public document called “Notice of a Public Tax Lien.” Consequently, the taxes you owe show up as a public record when lenders review your loan applications. This can make it difficult to get loans. Once a lien is attached to your asset, the IRS can take the proceeds if you sell the asset.

  • Wage Garnishment

    IRS wage garnishment takes place when the IRS contacts your employer to have wages withheld from your paycheck to satisfy IRS taxes owed. The IRS only has to leave you a very small amount of money for living expenses. IRS wage garnishments are harsher than garnishments from most private creditors. 

  • Bank Levies

    The IRS can contact financial institutions or banks you do business with to levy your bank account. Your bank will place a 21-day hold on the funds in your account, up to the amount of your tax debt. Then, if the issue doesn't get resolved, your bank will send the money to the IRS. 

  • Other Types of Property Seizure

    This is when the IRS seizes other types of assets in order to sell them to receive money to cover the tax amount owed. The IRS has broad powers to seize a significant amount of your personal and real property if you have unpaid taxes or delinquent returns. 

Referral to a Third-Party Liability Collection Company

If you owe tax and you don’t file, eventually you may be assessed taxes. If you fail to pay taxes or come to an agreement with the IRS or with the state regarding unpaid tax liabilities, your account could be referred to a third-party collection agency

Heightened Risk of Identity Theft

If you don't file a tax return, you put yourself at an increased risk of identity theft. Thieves steal Social Security Numbers, file fake returns, and then collect tax refunds. If you file a tax return as early as possible in the tax filing season, you can minimize this risk, but if you don't file at all, you increase the risk. If a thief realizes you're an easy target, they may file fake returns in your name for years, and if that happens, it can be very hard to clean up. 

How to Get an Extension on Filing Taxes

If you cannot file your taxes by the April deadline, you can get an extension from the IRS. This will give you additional time to gather your documents and fill out your return. You can get an extension by filing Form 4868. You can file this form on your own or request your accountant to file it. Most DIY tax prep software also has an option that lets you request an extension of time to file.

You will need to estimate your tax liability on this form. This is the amount of taxes you expect to owe. You should also include any payments you have already made, such as your estimated tax payments or withholding from your paycheck.

Once you file the extension, you have until October 15 to file your return. Of course, if that is a business or holiday, you have until the next business day. However, you will need to make a payment by the April deadline to avoid penalties and interest. The extension is for the filing deadline, not the payment deadline. 

You can also get an extension by requesting it in writing. Include your name, address, Social Security number, and the reason for your request. Mail this letter to the address listed on the tax form or instructions. If you are due a refund, there is no penalty for filing late. But as explained above, you should file your return as soon as possible to get your money back.

What to Do If You Have Unfiled Tax Returns

The first step is to contact a tax professional and let them know that you have unfiled tax returns. They will let you know what you need to do to become compliant. Often, even if you're missing decades of returns, you only have to file the last six years, but this can vary based on your unique situation. 

Don't contact the IRS directly to deal with unfiled forms. If you do this, the IRS will likely send you a notice telling you how much money you owe in back taxes. In most cases, you're better off proactively filing your own returns than letting the IRS file anything on your behalf. 

Many people avoid unfiled tax returns because they're scared of the potential bill. If this describes your situation, you are not alone but don't worry. There are many options. The IRS is willing to work with people. If you cannot pay the full amount of your back taxes, you can make arrangements with the IRS to pay them off over time. You can also request various types of tax relief such as penalty abatement or hardship status.

If you have any questions about your taxes or need help filing your return, you can contact a tax professional.

How Do Tax Pros Help With Unfiled Returns?

To file your unfiled tax returns, the tax pro will ask you about your income and deductions for the years where you didn't file. If you don't have income forms, the tax pro can request them from your previous employers or from the IRS. If you own your own business, you will also need records of your income and expenses. The tax pro can help you reconstruct bookkeeping records as necessary. 

Then, the tax pro will use this information to file federal and state tax returns for each of the years you have missed. Tax return forms change from year to year so the tax pro will use the form that was originally designed for the year in question. That ensures that you get all the relevant credits. 

Can You Get in Trouble for Not Filing Taxes?

The short answer is yes, you can get in trouble for not filing taxes. The IRS has a number of tools at its disposal to encourage people to file their taxes, and failing to do so can result in serious penalties.

If you don't file your taxes, the IRS can assess a failure-to-file penalty. This penalty does not apply if you do not owe taxes, but if you do not file for three years, you will lose the right to a refund as well. This penalty for failure to file is generally much larger than the failure-to-pay penalty, so it's important to file your taxes even if you can't pay them in full. The IRS may also file a tax return on your behalf, using information from your employers and financial institutions. This "substitute return" will almost certainly result in a larger tax bill, so you're better off filing your own return.

In addition to penalties, failing to file your taxes can also lead to interest charges and collection actions. The IRS can garnish your wages or place a levy on your bank account if you owe back taxes. So, it's in your best interest to file your taxes on time, even if you can't pay them in full.

Why Does the IRS Care About Unfiled Returns?

The IRS cares about unfiled returns because the IRS's role is to collect taxes, and it can't collect taxes without a tax return. The government can only collect taxes that have been assessed, and when you file a tax return, you are effectively creating a tax assessment. The IRS needs this assessment so that it can do its job. If you don't file a tax return, the IRS may seek an assessment by requesting that you file a return. If you don't file a return, the IRS may create a substitute for return and that creates the tax assessment.

Risks Associated With Substitute for Returns

The Taxpayer Advocate Office has been very critical of SFRs. The advocates are an independent part of the IRS, devoted to helping taxpayers with complex problems and reviewing IRS processes for fairness. This group says that the algorithms that create SFRs are patently unfair because they lead to unnecessarily high tax liabilities. It also says that these returns create an unfair burden on taxpayers because they have to correct them, and ironically, it says that SFRs end up creating more work for the IRS. Additionally, the Taxpayer Advocate Office also says that SFRs are ineffective because the IRS only ends up collecting a third of the taxes associated with these returns. If you have unfiled returns, try to address the situation before it gets to this point. If an SFR has already been issued, get help as soon as you can so that you don't get stuck with a bloated bill. 

Tax Advice on Unfiled Tax Returns

If you have unfiled tax returns, it's important to take action as soon as possible. The sooner you file, the sooner you can get any refunds you're owed and avoid penalties and interest. Additionally, the IRS is almost always easier to work with if you contact the agency rather than waiting for IRS agents to realize you haven't been filing. The best advice on unfiled taxes is to get help now. 

What Happens If You Just Don't File?

If you don't file your tax return, the IRS will eventually come after you. The agency generally takes up to six years to audit a return and collect any unpaid taxes. And if the IRS believes you've intentionally misled tax agents, it could have up to 10 years to come after you. So even if you think you can get away with not filing, it's not worth the risk.

If you don't have the money to pay your taxes, you should still file your return. You can set up a payment plan with the IRS, or look into other options like an offer in compromise. Not filing will only make your situation worse.

If you're thinking of just ignoring your tax return, don't. The consequences of not filing are not worth it. You'll end up owing more money in the long run, and you could even face criminal charges. If you have unfiled returns, get help today. Using TaxCure, you can search for a tax pro based in your area who has experience with unfiled returns. 

Filing your tax return is very important. Even if you can’t pay, you should always file. If you can’t file on time, you can get a six-month extension easily. Note that the tax extension is just on the tax return filing. The consequences for having unfiled returns vary depending upon how much you owe or if you are due a refund, this guide goes over the consequences by year for having unfiled taxes. For more information on how to file past returns, you can refer to this guide here on filing back taxes.

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