As the well-known saying goes, there are only two certainties in life — death and taxes. This axiom is tried and true. Anyone who has tried to avoid paying taxes can tell you as much. To be clear, failing to file a tax return when you are obligated to do so isn’t a good idea. The same goes for failing to pay the taxes you rightfully owe. However, it’s natural to wonder what would happen if you didn’t file a tax return. You wouldn’t be the first person to daydream about brushing off the taxman entirely. In some cases, honest mistakes and legitimate circumstances can also lead to you overlooking your tax obligations.
Here’s a look at various scenarios related to these questions. If you don’t file your taxes, or pay what you owe, here’s how it would play out in the real world.
If You Don’t File a Tax Return
There are only two scenarios in which you do not have to file a tax return. The first is if you don’t owe any money, because you have no taxable income. That situation can occur when you have not earned any money and therefore do not need to report your non-existent income. Or if you earned income but claim the standard deduction, effectively reducing your taxable income to nothing. Even so, professionals recommend filing a return anyway. It’s a good idea to make sure the IRS clearly understands your situation.
You’re also not obligated to file a tax return if the federal government owes you a refund. However, there is a very important caveat to keep in mind. You have to claim your refund by filing a return within three years. If you don’t, the IRS is legally entitled to keep it. So if you expect a refund, you must file a return to actually receive it.
If you are legally required to file a tax return, you must file it by April 15 (“Tax Day”). If April 15 falls on a weekend, the IRS will pick a different specific day. If you fail to meet the deadline, here’s what can happen.
- The IRS will begin to apply a monthly “failure to file” penalty to your outstanding tax balance as of April 16.
- This penalty is equal to 5% of your tax bill. It’s applied to every full or partial month you are late.
- The maximum penalty is capped at 25% of your tax bill.
- In 2020, the minimum penalty is $435 or 100% of your tax bill if you owe less than $435.
There’s some good news, though. If the deadline is approaching and you know there’s no way you’re going to be able to file in time, you can approach the IRS to request an extension. Alternatively, you can fill out Form 4868 (if you qualify). If your application is approved, the IRS will give you a new deadline date. Make sure to honor this date. The aforementioned penalties will apply just the same if you do not submit your income tax return by then.
If You Don’t Pay The Taxes You Owe
Strangely, the initial financial penalties for failing to file a return are harsher than if you file on time but then don’t pay what you owe. For the 2020 tax season, here’s what you’ll be charged if you submit your return on time, but don’t follow up with the payment.
- The IRS will apply a “failure to pay” penalty of 0.5% of your tax bill for each month that your taxes remain unpaid.
- This failure to pay penalty is capped at a maximum of 25%.
- You will also be charged compound interest, computed daily, on top of the penalty.
Over the long term, the interest can really add up. It can make the “failure to pay” penalty worse than the “failure to file” penalty. The IRS determines applicable interest by using the current short-term rate and adding 3%. Let that linger for a year or so, and you’ll see your tax bill skyrocket far beyond what you originally owed.
If You Don’t File and You Don’t Pay
Let’s say you really blew off your tax obligations. You didn’t file your return on time, then you failed to pay your taxes once you eventually did file. The IRS will waive the “failure to pay” penalties and apply only the “failure to file” penalties.
If this is your first such misstep, the IRS might have mercy on you if you meet the eligibility criteria. In most cases, you will be able to get a first-time penalty abatement if you meet these conditions.
- You weren’t legally obligated to file a tax return before going penalty-free for the three years leading up to the abatement request.
- There are no outstanding tax returns from previous years in your name.
- You do not have an outstanding tax balance, or you have arranged a payment plan with the IRS and are complying with its terms.
Should you fail to qualify for this abatement, it’s usually better to pay late than it is to file late. The short-term financial penalties are lower.
What If You Can’t Afford To Pay Your Taxes?
Many legitimate circumstances leave people unable to pay the taxes they owe. For example, an unexpected financial emergency may force you to use the savings you had set aside for your taxes. Or maybe you’ve suffered significant capital losses on investments. Or you really need to commit available funds to higher-interest debts like bank loans or credit cards.
If you’re in this situation, personal finance professionals recommend that you do the following things.
- Pay as much as you possibly can to reduce your tax balance to the lowest possible level. This will reduce the sting of the interest penalties.
- Contact the IRS to set up an installment-based payment plan.
- Make your payments on time.
- Remain in communication with IRS case managers if you cannot make an installment payment for a legitimate reason.
Try to keep the total length of your payment plan to 120 days or less. The IRS can apply administrative fees to plans that go beyond that length.
The Worst-Case Scenario
The absolute worst thing you can do is not file a tax return, then ignore IRS demands for payment after they estimate what you owe and start coming after you for the money. Should you dare to go this route, the IRS can hit you pretty hard with the following punishments.
- Garnish your wages until all the tax, penalties, and interest you owe has been recovered.
- Put liens on any real estate you own, which could potentially result in a foreclosure on your home.
- Subject you to criminal prosecution.
A prison sentence is a very real possibility if you continue to defy federal tax authorities. In the end, the taxman is going to get his share. It makes little sense to prolong the inevitable. Pay what you owe, when you owe it. Or at least make other arrangements with the IRS. Don’t ignore your tax problems, though. They won’t disappear.