The Hidden Consequences Of Not Filing Your Taxes

Jessica Ledingham, J.D., LL.M., Contributor

Jan. 16, 2024

As tax season opens, millions of Americans are experiencing anxiety. The dreaded fear of owing money to Uncle Sam can be overwhelming, leading some to delay or completely disregard filing their taxes. You might think you're saving yourself some stress by avoiding the process, especially if you can't pay. However, you should know the unseen consequences that accompany not filing your taxes, from hefty fines to future tax refund issues.

The Penalty for Filing Late Is Higher Than Not Paying

Are you aware that the IRS penalty for late filing is harsher than for non-payment of taxes? It's a surprising fact, but the IRS isn't soft on tardiness. For each month that your filing is delayed, the IRS levies a charge of 5% on the outstanding taxes. The clock starts ticking the day after the tax due date and caps at a maximum of 25% of your unpaid taxes. Should your tax return land at the IRS more than 60 days after the due date or the extended due date, the penalty becomes either $435 or 100% of the unpaid tax - whichever amount is less.

On the flip side, the penalty for not paying your taxes after filing on time is considerably milder. A mere 0.5% per month of your outstanding taxes is the asking price in this case. That’s a ten-fold difference! So, when faced with the choice between late filing and non-payment, it’s clearly less damaging to your wallet to file your tax returns promptly, even if you’re unable to settle your tax bill immediately.

Starting the Collection Statute Expiration Date

Just like Cinderella's coach turned back into a pumpkin at midnight, the IRS has a ten-year time limit, known as the Collection Statute Expiration Date (CSED), to collect the money you owe. However, the clock doesn't start the moment you owe taxes, but rather the moment you file your tax return. That's right - without filing, you're giving the IRS a non-expiring ticket to collect your tax debt, and they can keep adding interest and penalties as they see fit. Now, no one wants to see the taxman at their door forever, right? Filing your tax returns, regardless of whether you can pay the full amount or not, at least gets that clock ticking. This means there is a finite period during which the IRS can seek to collect your tax debt. So, don't prolong the tax collector's chase, file your taxes to get that countdown started! You need to make sure that you file your taxes correctly because if you amend your taxes or if the IRS states that you owe a different amount then the CSED will start over again.

Protecting Your Future Tax Refunds

Unfiled tax returns may not only leave a dark cloud hanging over you today, but they can also cast a shadow on your future. It's important to know that the IRS can and will withhold any tax refunds you might be eligible for in the coming years until all your previous tax returns have been filed. This is not a scenario anyone would want to find themselves in, especially if you're counting on that refund for essential expenses or investments. By filing your taxes in a timely manner, even if you can't pay immediately, you're safeguarding those future refunds, keeping your financial future brighter and free of unnecessary burdens.

Avoiding Additional Legal Issues

Let's not mince words: not filing your taxes can open a Pandora's box of legal issues. You may be thinking, "Could the IRS really bother with my small tax debt?" Absolutely. The IRS has the authority to file a tax return on your behalf in a procedure called Substitute for Return. However, this isn't as helpful as it may sound. The IRS, in this scenario, won't account for any deductions or credits you might qualify for. This could leave you with an inflated tax bill. Worse still, persistent neglect to file your tax returns could put you on the IRS's radar for tax evasion. Remember, tax evasion isn't just a fiscal faux pas, it's a federal crime. This means you're not just looking at penalties and interest. You could be staring down the barrel of incarceration. So, when it comes to tax filing, it's always better to be timely than sorry.

Options for Payment Plans and Compromises

Feeling strapped for cash and unable to pay your tax bill in one go? Don't throw in the towel just yet. The IRS is not entirely unsympathetic and provides avenues to help ease your financial strain. There's the option of spreading out your payment over an extended period through an installment agreement. This payment plan permits you to whittle down your debt in manageable chunks, thereby providing a pathway towards financial recovery.

And that's not all. There's also an Offer in Compromise (OIC). This is not just any offer; it's a potential lifeline. An OIC is an agreement you make with the IRS, where they allow you to pay less than what you owe. Yes, you read that correctly – less! It's like the IRS waving a financial white flag, offering you a reprieve. This option can provide substantial relief and helps to ensure that your tax debt doesn't become a financial albatross around your neck.

Bear in mind, though, that both of these options require you to have filed your tax return. So, even if you're unable to pay your tax bill immediately, ensure you file your tax return promptly. This step opens the door to these beneficial options and sets you on the path towards gaining control over your financial situation. Remember, the goal is not just to survive tax season, but to navigate it in a way that supports your long-term financial health. So, go ahead, file that tax return. Even if you can't pay right away, remember that you have options. And these options might just be the lifeline you need.

By Jessica Ledingham, J.D., LL.M., Contributor

This Forbes article was legally licensed through AdvisorStream.