Filing your taxes is a responsibility most people must fulfill every year. However, some individuals may wonder what happens if they don’t file their taxes. Failing to do so can have serious financial and legal consequences. Here’s what you need to know about the risks of not filing your tax return.
1. Penalties and Fines
One of the immediate consequences of not filing your taxes is the possibility of facing penalties. The IRS imposes two main types of penalties:
- Failure-to-file penalty: If you don’t file your tax return by the deadline (usually April 15), the IRS charges a penalty that can be 5% of your unpaid taxes for each month your return is late, up to a maximum of 25%.
- Failure-to-pay penalty: If you owe taxes and don’t pay them by the deadline, the IRS charges a failure-to-pay penalty, which is usually 0.5% of the unpaid taxes for each month the tax remains unpaid.
The longer you wait to file or pay, the more these penalties add up, creating a heavy financial burden.
2. Accrued Interest on Unpaid Taxes
In addition to penalties, interest is charged on any unpaid tax amount. This interest starts accumulating from the original due date of the return and continues until the balance is fully paid. The IRS interest rate is based on the federal short-term rate plus 3%, and it compounds daily, meaning the amount you owe will keep growing over time.
3. Loss of Refund
If you are owed a refund, you must file your return to claim it. The IRS typically allows you to file within three years to receive your refund. After that, any unclaimed refund is forfeited, and the government keeps your money. In other words, by not filing, you might be leaving money on the table.
4. Impact on Future Loans and Financial Aid
Many financial institutions and lenders require proof of tax filings when approving loans or mortgages. If you haven’t filed your taxes, you may have trouble securing a loan, mortgage, or even federal student aid. Lenders often request copies of your tax returns to assess your financial situation, and not filing could limit your access to credit and financial resources.
5. IRS Collection Actions
If you owe taxes and don’t file, the IRS may eventually take enforcement action to collect what you owe. These actions can include:
- Tax Liens: The IRS can place a lien on your property, such as your home or car, which gives them a legal claim to your assets until your tax debt is paid off.
- Tax Levies: In extreme cases, the IRS can seize your property, garnish your wages, or take money directly from your bank account.
- Passport Revocation: If your tax debt exceeds $55,000, the IRS can notify the State Department to deny or revoke your passport.
These actions can severely impact your financial health and personal freedom.
6. Potential for Criminal Charges
While the IRS generally focuses on collecting unpaid taxes through penalties and interest, willful failure to file your taxes can result in criminal charges. The IRS can pursue criminal tax evasion charges if they believe someone is intentionally avoiding taxes. In extreme cases, this could lead to fines of up to $250,000 and imprisonment for up to five years.
7. Increased Risk of an Audit
Not filing your taxes can increase the likelihood of the IRS auditing your financial activity. If they notice a gap in your filings, they may scrutinize your past returns more closely. Even if you do not owe money, the IRS may still investigate your financial records, which can be stressful and time-consuming.
What to Do If You Haven’t Filed
If you’ve missed filing a tax return, it’s important to act as soon as possible. Here’s what you can do:
- File your late returns: Even if you missed the deadline, you can still file your return. The sooner you do, the fewer penalties and interest you will face.
- Set up a payment plan: If you can’t afford to pay your tax bill in full, the IRS offers payment plans that allow you to pay in installments over time.
- Seek professional help: A tax professional can help you navigate the process of filing late returns and dealing with the IRS, potentially reducing penalties or setting up payment plans on your behalf.
Conclusion
Not filing your taxes can lead to a range of serious consequences, from hefty fines and penalties to IRS collection actions and even criminal charges. It’s essential to stay on top of your tax obligations, but if you’ve missed the deadline, taking action now can minimize the damage. If you’re unsure how to get back on track, consider reaching out to a tax professional who can help you resolve the situation and avoid future problems.