Everyone at some point in their tax-paying lives has been tempted to skip the whole ordeal, or delay the chore to the point that you owe Uncle Sam five years’ worth of tax returns. What would happen if I didn’t file my taxes this year? Is the IRS really going to come after me?
Well, after doing some digging, we've concluded you'd be better off filling out your tax return in crayon than sitting on your hands and letting the IRS have at you — no matter how daunting the task might be.
“Every once in a while I’ll have a client with a health issue or something [that prevents them from doing their taxes],” says Paul Bogdanoff, a certified public accountant with Bogdanoff Henderson PC in Indianapolis. “They’re just overwhelmed with life and they just haven’t gotten to it because it’s too much for them to deal with.”
There are countless scenarios in which a person might fail to file or pay their taxes. We outlined a few common examples of what you can expect if you wind up falling short this tax season:
...It's April 16 and you still haven’t filed your taxes:
If you don’t send yoru return to the IRS by the April 15 deadline, you’ll get hit with a failure-to-file penalty, which starts at 5% of however much you owe, maxing out at 25% of your tax bill. If you wait more than 60 days to file, you're charged a $135 fee or 100% of the taxes you owe (whichever is less). There’s an exception here: If you’re owed a refund, you won’t be charged a late-filing fee at all. But you won’t get that refund unless you file a return, and you’ve only got three years to claim it before your refund winds up in Uncle Sam’s hands.
What to do: If there are mitigating factors that make it impossible for you to file on time, you can apply for an extension with the IRS. That will buy you six months (until Oct. 15) to file your return.
“It’s important to respond before the IRS [notices you haven’t filed],” Bogdanoff says. “If you’re proactive, that’s much more beneficial than if you’re doing it because you’ve gotten a call or somebody from the IRS has knocked on your door.”
...Woot! You’ve been approved for a tax-filing extension:
Don't crack open that bottle of celebratory bubbly just yet. An extension means you won’t get hit with a 5% failure-to-file penalty, but it doesn’t mean you’ve got an extra six months to pay the taxes you owe the federal government. If you do owe taxes, late fees start at 0.5% of your tax bill, which begin accruing on the first day you're late.
On top of that, you’ll be charged a painful 3% daily compounding interest on the unpaid balance — unless you figure out how much you owe and pay at least 90% of the balance by April 15.
What to do: Figure out what you owe and start paying as much as possible. If you got an extension and you’ve paid at least 90% of your tax bill by April 16, the late payment penalty won’t apply. But you still have to pay the remaining balance by the extended deadline.
“Most people are shocked by the dollar amount they’re going to end up paying [if they ignore their taxes],” Bogdanoff says. “I try to at least soften the blow a little bit by telling them upfront that it may be a significant number and then give them a week or two to come to grips with that before I tell them how much it is.”
...You've filed your tax return by the April 15 deadline but still haven't paid your taxes:
You’ll still face penalties, but the IRS looks kindly on taxpayers who at least file their return, even if they can't pay their whole bill. On-time filers pay a discounted late-payment fee of 0.25% per month so long as they have a payment agreement in place. But really, it’s the compounding 3% interest charges on unpaid tax bills that can do the most damage.
What to do: If you owe less than $50,000, you're eligible to set up an installment plan with the IRS and should do so ASAP. You might consider enlisting the help of a CPA or tax attorney for help, especially if you’re several years behind. By giving a tax professional power of attorney over your taxes, they can act as middleman between you and the IRS. You can apply for a monthly payment plan here (there’s a $52-$105 application fee).
...You haven't filed your taxes OR paid your tax bill:
The IRS will calculate penalties for both transgressions (5% of your tax bill for failure-to-file plus 0.5% for filing late) and then subtract the late-payment fee from your failure-to-file fee.
On top of that, you’ll get hit with the aforementioned fee of $135 or 100% of your tax bill (whichever is less) for filing after 60 days. And don’t forget about that 3% daily compounding interest charge -- you’d be surprised how quickly those fees can add up.
If you’re several years behind on your taxes and find that you were owed a refund in a certain year, that could help offset your tax bill. But timing is everything. As we mentioned, there’s a statute of limitations on unpaid tax refunds. If you file for a refund three years after it was originally due, you’re out of luck.
What to do: If a payment plan isn’t an option, you will either have to come up with justifiable proof that you’re unable to pay your taxes or you can apply for an Offer in Compromise (OIC) agreement. An OIC essentially settles your tax debt for a reduced amount.
There are situations when taxpayers simply can’t pay their bills and don’t qualify for an OIC. In that case, the IRS will eventually levy a federal tax lien against you, which can wreak havoc on your credit. They may hold off on liens if you can prove undue financial hardship (call the number listed on your IRS letters to argue your case). In a worst-case scenario, the IRS can garnish your wages, bank accounts, Social Security benefits and even your retirement income to recoup unpaid taxes.
Whatever you decide to do, action is always better than inaction.
“I do several hundred tax returns this time of year and the number of people I deal with [who are behind on taxes], 100% of them come to me after they’ve gotten in trouble with the IRS,” says Bogdanoff. “[As a CPA], you’d much rather have the client walk in the door before the axe is going to fall.”
Have a tax question? Send us an e-mail here.