Financial confession time: There was one year when I didn’t file my taxes. That's why I know what happens when you don't file your taxes.
I know that’s particularly horrendous for a personal finance writer to admit, but it’s the truth. It happened a full two years before I had my come-to-Jesus moment about money.
To be honest, I didn’t really know how taxes work, and I thought that I would owe the government a big check. As a waitress making less than $25,000, the thought of handing over my hard-earned money felt depressing.
I hoped the Internal Revenue Service (IRS) wouldn’t care about me. After all, I was a small fish in a big pond. No one would really care if I failed to file, right? Unfortunately, I was very, very wrong.
My Difficult Lesson About What Happens If You Don’t File Taxes
The government wants its money, and it will come for it.
When you receive a W-2 form, 1099 form , or similar tax document, a copy of the form is also sent directly to the government. Although it may take time for the database to catch up, the computer will automatically match the forms sent to them to your Social Security number to make sure you reported the income appropriately.
It took another two years, but that spring, I got a very scary letter from the state of Massachusetts declaring that I hadn’t paid my state taxes.
If the IRS didn’t receive its money, it would hit me with a very steep fine and prosecute me for tax evasion — the same charge the feds used to lock up Al Capone. Not wanting to spend the rest of my days on Alcatraz, I started to panic in search of a solution.
What made things worse? I was completely unprepared to deal with my sudden tax nightmare.
By then, I no longer lived in Massachusetts. I was uncertain as to how I should address my past state taxes for a state from which I had moved, in addition to my outstanding federal income tax.
To add insult to injury, I didn’t know how to file a late tax return. I was still financially illiterate, and this letter scared me. I didn't know what would happen to me, and all because I didn't file my taxes. It made me feel like I’d ruined my whole life with one decision I’d made at age 23. My negligence two years earlier came back to bite me in the butt.
“If a taxpayer owes the IRS tax, the government will make a big deal of the situation because it wants its money along with penalties and interest,” says Logan Howard, CPA. “Not filing and paying tax could lead to more severe legal action, such as a levy, lien, or even jail time. I personally know somebody who went to jail for not filing.”
What Actually Happens, From Uncle Sam Himself
According to the IRS, this is what happens if you don't file taxes:
- Two penalties can apply: one for failure to file and one for paying late, and they can add up fast.
- The late payment penalty is 5 percent of the owed amount per month and increases each month the taxes remain unpaid (up to a maximum of 25 percent).
- The penalty for failure to file is as much as 5 percent of one’s unpaid taxes each month (up to a maximum of 25 percent). If the return is filed in the middle of the month, the filer will still be charged for the full month’s payment.
- Income taxes that were not filed are charged with the entire unpaid tax required, or a specific amount, based on the year in which the information was due — whichever is less.
- To know how much the specific dollar amount will be, be aware of when the taxes were meant to be filed. Those that were meant to file after January 2020 will be charged $435, while those whose returns were due prior to 2020 can expect to pay somewhere between $100 to $210. The exact amount required is available on the IRS website.
If you owe taxes, the best course of action is to contact the IRS directly and work out a payment plan. If you let your unpaid taxes linger, the IRS can and will make moves to collect your taxes. It reserves the right to file a Notice of Tax Lien, which is a claim against your property that is used to protect the government’s interest in your debt.
If you don’t pay your balance in full within 10 days of the first notice, a tax lien will be filed, according to the IRS, which notifies creditors that the IRS has a claim against all of your current property, and any property you acquire after the lien is instated.
The IRS may also issue a federal tax levy, which is a flat-out seizure of your property assets. It may also levy your wages, bank account, or retirement income and apply that money toward your tax debt. If you are owed any tax refunds, including state refunds, the IRS may take those, too.
When a levy is issued, it may go to a third party, which in most cases can be embarrassing and show that you’re not up to date on your tax payments.
In some situations, the IRS may even launch a full-blown criminal investigation and file charges for tax evasion, though this is usually a method of last resort for the agency.
If you can’t afford to pay your owed taxes up front and in full, you can apply for a payment installation agreement, offer in compromise, or temporary delay of collection.
An installment agreement allows you to make monthly payments over a period of time, up to a maximum of 72 months.
Under an installment agreement, interest and penalties may still accrue. If you have more than one year of tax problems, you potentially can adjust your installment agreement to include all your tax debt.
In order to qualify for an installment agreement, you must also be current on your tax filings.
Individuals who owe less than $50,000 can apply for the payment agreement online — before applying, however, you do have to wait for a notice of a balance due.
Meanwhile, an offer in compromise (OIC) is a settlement offer in which you pay a portion of your taxes now and the IRS forgives the remaining debt.
The amount you end up paying is lower than the amount owed, so eligibility is strict — often the IRS looks at a taxpayer's assets to determine how much they can afford. It is up to the taxpayer to complete the offer and the IRS reviews what the taxpayer is offering to settle their debt.
Most OICs are typically done through a lawyer or CPA and the OIC itself has an application fee of $205, unless the filer qualifies for a low-income certification or if a Doubt as to Liability form is submitted.
In other cases, you may also request a temporary delay of collection. If the IRS determines that you cannot pay any of your tax owed, your account can be labeled “currently not collectible” and you can delay collection until your financial situation improves — though penalties and interest will still accrue while your account is “frozen.”
How Filing Late Worked Out for Me
I had to hire an accountant to help me because I had no idea where to start. I just wanted to fix the situation and keep myself out of trouble with the law. So I spent a lot of time sorting through old papers to finally find my W-2 forms from the two restaurants where I worked in 2012.
My accountant filed both a state and federal tax return for me, and I had to pay a late-filing fine on top of my accountant fees (he charged $150 an hour for the work).
In total, I coughed up $250 to my accountant and about $400 to the government. I also received a tax refund from the government, which I hadn’t expected. Unfortunately, I had to use it all to cover the expenses I incurred for filing taxes late.
The amount I owed the government was so little because I had made so little working as a waitress. If I’d had a higher-earning job and skipped out on my taxes, that bill would have been much bigger.
The Bottom Line
Moral of the story? File your taxes, even if you don’t make that much money. They’re an important part of your financial health, and they can come into play when you least expect it.
What you don’t know is that upon filing a tax return, the statute of limitations starts when the taxing authority can go back and audit you.
If you do not file a tax return, the statute of limitations never starts, which means that five or more years later, they can come looking for the money owed.
I’m thankful that about a month after I got that letter, I managed to completely take care of my taxes. Still, I had to use about half of my emergency fund to cover the up-front expenses of my accountant and the fees. That was a demoralizing blow.
If I’d filed on time, I would’ve gotten money back from the government that wouldn’t have gone toward late fees. Instead, I could have used it to boost my emergency fund or begin investing.
Thankfully, now I know what happens when you don't file taxes, and now I know how important it is to avoid missing the deadline.
All I got by avoiding my taxes was stress and a scary letter — still far better than the deal actor Wesley Snipes received. Now I use that same accountant to help me with my taxes as a freelancer, and I meet the filing deadline every year. I would say I’ve learned my lesson on what happens if you don’t file taxes: Do it, no matter how tempting it may be to skirt the law.
Additional background information in this article was provided by Chris Cicalese, CPA, of Alloy Silverstein.