This is usually the time of the year when I get the question, “So, what will really happen if I don’t file my federal income tax return?” Seldom is the question asked from a tax protestor inquiry. In most cases, the person is asking the question because they have prepared their tax return and it reveals that they owe a tax debt. Therefore, their thinking, I presume, is why file a tax return showing a tax debt that they cannot afford to pay.
Assuming that the person has a filing requirement, there are potential criminal penalties for willfully failing to file a tax return. However, IRS criminal prosecution is not common in the standard non-filing case. What is common is assessment of monetary penalties and the IRS seeking collection of a tax debt, even when a tax return is not filed. Therefore, simply not filing a tax return to avoid a tax assessment is a horrible tax strategy.
Lots of functions at the IRS are completed these days by computers. Usually after the October extension to file deadline, computers start to analyze social security numbers comparing whether income was reported by a third party for a specific social security number, and whether that social security number has a corresponding tax return. If income was reported, and no corresponding return was processed by the IRS, then the computer may flag the social security number for review.
Once a non-filing situation has been flagged, the account is reviewed for potential fraud. If there appears to be indications of fraud, the case may then be referred to the IRS Criminal Investigation Division. Assuming that there are no indications of fraud, the IRS will contact the non-filer and demand that all delinquent returns be filed.
If after proper notice the non-filer fails to file the requested tax return(s), the matter may be slotted for a substitute for return, or force filing. Basically, the IRS uses the income information reported by third parties to prepare a tax assessment in the best interest of the government. Shockingly, the IRS sometimes moves slowly and does not get around to filing the substitute for return until several months, or even years, after the return is due. If the non-filer fails to file the tax return or provide proof that a return was not required, a tax assessment will eventually be made and then referred to the IRS Collections Department where liens, levies, and property seizures may be used to collect a debt on a tax return that was never filed.
Once the assessment is made, here comes the expensive part: monetary penalties and interest assessments, in addition to the tax debt owed. Assuming that there was a tax debt assessed, there is both failure to file penalties and failure to pay penalties. The monetary penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of the unpaid taxes. The failure to pay penalty may be as much as 25 percent of your unpaid taxes. Then of course is interest charges set at a variable rate from the date the return was due.
Lastly, legal fees for someone like myself to get dig you out of the tax mess. So the lesson to be learned is to file your taxes when required. Even if you can’t afford to pay the debt owed, time is on the side of the government and eventually, a tax owed will likely be assessed and then pursued; but not always paid.
This article is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.