Haven’t filed taxes in a while? I get it — who has time for taxes? As an accountant, I’ve seen it all. But now it’s been five years since you last filed and you’re starting to wonder if this is how people end up in jail.
Take a breather. In most cases, it’s not the end of the world to fall behind on taxes… But you might want to skip the dollar-extra guac at Chipotle for a while.
What happens if you don’t file your taxes?
Generally speaking, the severity of the situation depends on how overdue your tax return is. If you only forgot to file last year’s return (or the one for the year before that), you’re not in hot water — yet.
A tax return that’s only a couple years late will net you some penalties, but that’s it. More than three years overdue, however, and the real consequences set in.
What are the risks of filing your taxes late?
Let’s look at all the possible ramifications of not filing your return:
Civil and criminal penalties (1+ years)
If you’re late on filing, you’ll almost always have to contend with these two penalties:
- Failure to file penalty — 5% of unpaid tax per month
- Underpayment penalty — 0.5% of unpaid tax per month
These increase the longer the taxes go unfiled and unpaid, but they cap out at 25% of the unpaid tax due.
Jail time for late returns
Can you go to jail for not filing a tax return? Yes, as a matter of fact you can. Technically, jail time for willfully failing to file a tax return is one year in the can.
That being said, the IRS rarely, and I mean rarely, uses this option. It’s extremely expensive to prosecute taxpayers, and the IRS is strapped for cash as it is. Typically, jail time is only on the table for high-profile taxpayers with large unpaid tax bills.
I mean people like Stephen Baldwin and Wesley Snipes, who owe more tax in a single year than most of us dream of earning in our lifetimes.
It sounds medieval, but here’s the thought process: if the IRS makes an example out of one or two taxpayers, the rest will stay in line out of fear.
Passport revocation and frozen bank accounts
Technically, the IRS has the authority to revoke your passport and freeze your bank account over unpaid taxes. But these measures are reserved for extreme cases where criminal intent is obvious.
Still feeling anxious? Here are some questions to ask yourself:
- Are you actively avoiding communication with the IRS?
- Do you owe more than $55,000 in taxes?
- Is your understated bill the result of a tax evasion scheme?
- Did you get sick pleasure from putting salt on snails as a child?
If you answered “yes” to all of the questions above (except maybe the last one), you’re probably a criminal and should rightfully lose access to your passport and bank accounts. (Okay, especially because of the last one.)
To everyone else, you’re in the clear. Even if you owe more than $55,000 in taxes, as long as you’re working with the IRS to resolve it, there won’t be further repercussions.
More likely audits (1+ years)
The danger with filing your tax return late? You give the IRS more time to find a reason for an audit.
The three-year rule for IRS audits
The rule is: the IRS only has three years from the time your tax return was filed to audit you.
If they miss the three-year mark, the statute of limitations kicks in and they have to leave it be. (There are some exceptions, of course, but this rule shields the majority of taxpayers.)
Importantly, the clock doesn’t start until you file. So if the last time you filed a return was 2005, the IRS can audit you as far back as that. It typically tries not to go back further than six years, but it will if it has reasonable cause to.
An example of reasonable cause would be substantial unreported income. For example, if your state or old employer tells the IRS that you had sizable income in a year where you didn’t file, they might follow-up.
People routinely file 1099’s late, and states are always playing catch-up on their own information-sharing procedures… Information could trickle in about your financial situation well after the fact.
Takeaway: The longer you wait, the more time the IRS has to catch mistakes or red flags.
IRS files for you (1+ years)
Sometimes, the IRS will literally send delinquent taxpayers a bill, in a process known as“Substitute for Returns” (SFRs).
This happens when the agency has enough information about you from your employer, banks, and other payers that it’s able to create a substitute return for you.
This usually happens when you’re consistently delinquent. It doesn’t notify you when this happens, but it might send you a bill based on its calculations.
Why getting sent a tax bill is bad for you
At first glance, this sounds like the best-case scenario. The IRS gets its money, and you don’t have to file a tax return. Everybody wins, right?
The closest thing I can compare this to is your mom “cleaning” your room for you, i.e. stuffing things into a trash bag never to be seen again.
This method almost always results in overpaying because the IRS won’t bother factoring in any tax breaks other than the automatic ones like your standard deduction. Remember — they aren’t pleased with you at this point, so you’re going to get the least favorable treatment possible.
For example, if you earn $5,000 as a freelancer, you can lower that number with business write-offs when you file. If you use Keeper to find these deductions for you, you can take quite a bit of money off your taxable income and end up paying a lot less.
But the IRS doesn’t know what write-offs you’re entitled to, and frankly, it doesn't care. It’ll just bill you for the whole amount and call it a day.
Bottom line: Unless your tax situation is extremely simple, a substitute return won’t work in your favor. It’s much better to file yourself.
Forfeiting your refund (3+ years)
Arguably the most painful consequence of not filing: losing the right to your refund. If your return is three or more years past due, you can’t claim it when you finally file.
This is especially painful since many people put off filing their returns because they have a refund. (After all, penalties and interest only kick in if you have tax due. So if you don’t owe, there’s no penalty.)
Wait too long, though, and you lose your tax refund. It doesn’t matter how big it was.
Being forced to paper-file (3+ years)
The IRS’s e-filing program can only accept returns for the current year and the two years previous. Returns further back than that have to be paper-filed.
Why e-filing is better
Ask any tax professional, and they’ll tell you the best way to file your tax return is to e-file it.
Why? Let me tell you:
- It’s faster. Processing times for e-filed returns are usually less than three weeks. Paper filed returns, on the other hand, can take several months — especially since the IRS currently has a backlog of over 20 million unprocessed paper returns.
- It’s more secure. Identity theft and tax fraud are real problems, and tax documents mailed through the postal service are routinely targeted. E-filing offers an added layer of security for your sensitive information.
- It’s easier to verify. Unless you’re using certified mail, regular mail comes with the disadvantage of not being able to track your documents. E-filing, on the other hand, offers almost immediate confirmation that the IRS got your return.
In short, paper-filing should always be a last resort. It’s not the preferred method.
Some people think that paper filing reduces your chance of an audit, but that’s simply not the case. If anything, it increases the likelihood of an inspection due to the high risk of making a mistake by hand.
Having to pay more (3+ years)
Tax software makes it easier for the average person to do their own taxes — even business taxes. But in many cases, you can only use it for the most recent tax years.
The further back you go, the harder it is to find software for the tax year you need.
That might force you to pay an accountant. Tax professionals are often more expensive than software to begin with. But they’ll likely charge you even more for the added work of filing a return that’s way past due.
Why accountants charge more for older returns
Your accountant can’t just file your 2016 return on a 2022 version of form 1040. They’d need to retrieve the old forms and brush up on old tax law.
Considering how much taxes have changed since the Tax Cuts and Jobs Act passed in 2018, this is no small task. And even if your return is more recent than 2018, something will have changed.
The takeaway here? The older your return is, the higher your tax prep fees will be.
How do you get back on track with your taxes?
Now that you know the consequences of falling behind, I don’t want to leave you with only bad news. Taxpayers fall behind all the time. That means there’s already a well-established path to get you back to compliance. Trust me: No matter how behind you are, someone’s been there before. And you can do it too.
Let’s look at how to find the straight and narrow:
What to do no matter how behind you are
Request tax transcripts for missing documents
The very first step in this process is to make sure you have accurate records for the year you’re dealing with. If you’re missing documents, request an IRS transcript using their online portal.
An IRS transcript shows all of the information they have on file for you for that particular year — things like W-2s and 1099s.
Not only will this give you all the necessary information to file, it’s also helpful to know what the IRS is expecting to see on your return.
Pay or set up a payment plan with your return
The sooner you pay the balance, the better. Penalties and interest will continue to accrue until you pay off the debt or establish a payment plan. You can enroll in one online or attach Form 9465 to your return when you file.
Whether you decide to pay in full or enroll in an installment plan, the sooner you take steps towards resolving the debt as soon as you can. That makes it more likely it is that the IRS will work with you.
Ask to get your penalties waived
Lastly, you can request that the penalties be waived. There’s no guarantee it’ll work, but the IRS is surprisingly understanding with taxpayers who are trying to make amends. (After all, it just wants to make sure it gets your money.) Here are the the options you have:
- First time penalty abatement: If this was your first offense, you’re off the hook. However, you’ll need to demonstrate that you filed the delinquent return and are current with all your other filings.
- Reasonable cause: In some cases, the IRS will waive your penalty if you can demonstrate you had a reasonable cause for filing late. An example would be a medical emergency or family death. If you explain the circumstances and can demonstrate that you’re on top of your current filings, the IRS might give you a pass.
Offer in compromise: Similar to medical debt, if you simply can’t pay what you owe, the IRS will accept your best offer. In other words, you can haggle it down. Unfortunately, it’s not as easy as it sounds. For the IRS to even consider it, you’ll have to provide supporting documentation verifying the facts of your situation, and be up-to-date with all of your other tax filings.
Takeaway: If you’re willing to work with the IRS, it’s willing to work with you. At the end of the day, it really just wants to make sure it gets paid.
What to do if you’re 1+ years late
E-file the overdue return
The IRS’s e-file program is open for the current year and previous two years. So if you’re still within that window, be sure to e-file your return.=
Not only is e-filing faster and more secure, it involves using a tax filing program, which usually minimizes errors.
Be sure to calculate your penalties and include those with the payment. The sooner you get them paid, the less interest you’ll accrue.
What to do if you’re 3+ years late
Paper file the overdue return
You can still use tax software if your return is more than three years old, but you’ll have to print out your return and mail it in. The sooner you can get it in the mail, the better.
I highly recommend sending it using Certified Mail. That way, you’ll have proof that your return was delivered.
Be sure you’re using the correct form year when submitting old returns! You can’t file a 2016 return using 2021 forms. Any tax software you use will have to be able to support the filing year you’re dealing with. If you’re unsure, it might be worthwhile to involve a tax professional.
In a perfect world, you don’t fall behind at all. And tools like Keeper can make it more realistic to stay on top of your annual filings with our easy tax-filing app.
But at the end of the day, it doesn’t matter how far behind you are. If you take the appropriate steps to make amends, you won’t face jail time and may even get penalty relief. Follow the steps above and you’ll be ordering guac again in no time.
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