Too many individuals and businesses do not file their tax return because they cannot afford to pay the tax bill. Yet, did you know that the consequences for not filing your tax return are harsher, than if you filed but cannot pay the tax liability? There are other consequences as well for not filing a tax return that go beyond the monetary penalties. Learning the different consequences may just be enough of an encouragement to finally file those returns and start working to a resolution.
The most important consequences of not filing your tax return, either Federal or State can include more monetary penalties and/or increased interest penalties. Failure to file a tax return by the due date whether you have an extension or not, can result in a 5% tax penalty per month. This accumulates to a maximum 25% penalty after 5 months of not filing and accrues annually at a 4% interest penalty rate on the balance owing.
If you file after 60 days there is still a $135 minimum penalty or 100% penalty of the unpaid tax whichever is greater. However, if the IRS find the result of not-filing was done with intent to commit fraud, the penalties significantly increase to 15% per month to a maximum of 75% penalties. The act of not filing your tax return can significantly increase your tax liability. Many states also assess penalties or ‘fines’ for those that do not file a tax return.
Incarceration – or jail time is a very rare occurrence but can be used by the IRS as the ultimate penalty for those that do not file tax returns. If you are considered to be evading taxes in order to fraud the government out of your tax liability, you could spend up to one year in jail with a $25k penalty for every year that you did not file a tax return.
Loss of Refund – even if you think you may get a refund, there is a statute of limitations of only 3 years, after which any refund you are owed is forfeited to the government.
Unable to Carry Losses – for many businesses it is imperative that losses from operations be carried over for any investment loss over $3000. Yet if you do not file a tax return you cannot carry these losses forward, creating even more tax liability.
Loss of Tax Credits – such as the Earned Income Tax Credit and other tax credits must be claimed within a certain amount of time or they expire. If you do not file a return, most likely these credits are no longer applied.
Substitute for Return (SFR) – the IRS has the option to submit a SFR if you do not file a return, most often only giving you one exemption, standard deductions and missing other tax credits, potentially turning a refund into a tax bill.
Audit Statute of Limitations Never Begins – if you never file a return the IRS has the option to audit an SFR return at anytime even though the IRS normally only has 3 years from the date you file a return to audit it. If you do not file this limitation is not enacted.
No Bankruptcy Options – without filing a return you cannot file for Chapter 7 or 13 Bankruptcy.
Collection Efforts – such as wage garnishments, bank levy, tax levy or a tax lien could be placed against you or your property by the IRS to recoup the tax bill owed under an SFR.
Whether you are an individual or a business it simply makes sense to file a return and work out a payment plan.