The consequences of not filing your taxes range from missing out on refunds to facing millions of dollars in tax assessments and criminal fraud charges. But for most people, the consequences are between these two extremes.
When people miss filing for a single year, they often get caught up in a cycle of worry. Then, they freeze from the stress, and they don’t file their taxes for years. Some people go decades without filing.
People contact our office regularly to find out what happens if they don’t file. The answers really vary depending on the situation, but to give you an idea of what to expect, this article provides an overview of the situation based on several different scenarios.
Want to get help now and put this stress behind you? Then, contact us at Wiggam Law today. We’ll talk with you about the consequences of unfiled returns and help you get caught up in the most efficient and least expensive way possible.
Three Years or Less — Due a Tax Refund
Even if you aren’t required to file, you may want to file to get a tax refund. You have three years from the filing deadline to claim a tax refund. Once that date passes, you can still file, but you forfeit your refund.
On average, Americans receive about $3,000 per year in tax refunds, but a lot of money gets left on the table. For example, about a month before the final deadline to claim a refund for 2019, the IRS issued a press release saying there was still $1.5 billion in unclaimed refunds.
Three Years or Less — Owe Taxes
When you owe taxes, the situation is a bit different. If you eventually file, the IRS will retroactively apply interest and penalties to your account. If you don’t file, the IRS may generate a substitute for return.
The IRS’s substitute returns use income numbers submitted by other parties. They usually don’t include any deductions, and they typically result in a much higher tax liability than if you had filed voluntarily. While it’s possible to contest a substitute return, it’s usually easier to file before the IRS issues one.
Four to Six Years — Due a Refund or Owe Taxes
If you haven’t filed for four to six years, you still have time to claim a refund (if applicable) on the returns due less than three years ago. With the older returns, you can’t collect a refund, but if you owe tax, you should file.
By filing before the IRS notices the unfiled returns, you may be able to minimize penalties, and you also avoid the risk of having a substitute return generated by the agency.
Note that if you were due a refund on a return that was due more than three years ago, you may still be legally obligated to file. However, this is a bit of a gray area. Even if you’re supposed to file, the IRS is relatively unlikely to follow up on an unfiled return with zero balance owed.
To give you an example of when this might apply, imagine that you earned over the standard deduction (which triggers a filing requirement), but your employer withheld more than enough to cover your tax bill. Alternatively, say that you had over $400 in net self-employment income (which also triggers a filing requirement), but you would have qualified for an earned income tax credit that more than covers your tax liability.
In both of these situations, you had a legal filing requirement, but you may be able to avoid filing since you don’t owe. A tax attorney can help you decide whether or not it’s worth it to file.
Seven to 10 Years or More — Due a Refund or Owe Taxes
By the time people get to this stage, they are often really worried about the situation, or they’ve decided to exist “under the table” and never file again. The good news is that it’s probably not going to be as bad as you think, and in most cases, you only need to file the last six years of returns.
Generally, as long as you get compliant with the last six years, the IRS won’t make you file any additional back taxes, but there are exceptions to this rule — particularly if fraud is involved. When you consult a tax attorney about your unfiled returns, they will help you determine the best strategy based on your unique situation.
Financial Consequences of Not Filing Tax Returns
Not filing tax returns can have a variety of financial implications, including the following:
- Failure-to-file penalties of up to 25% of the balance owed.
- Failure-to-pay penalties of up to 25% of the balance owed.
- Fraud penalties of 75% of the balance owed, if applicable.
- Interest from the due date of the return until you pay, at the federal short-term rate plus 3%.
- Risk of the IRS generating a substitute return and assessing a high tax liability.
- Risk of the IRS keeping refunds to cover taxes it thinks you owe due to unfiled returns.
- Inability to prove your income for car loans and mortgages.
- Difficulty renting an apartment if the landlord wants to see your tax return.
- Inability to prove your income for social assistance programs.
Additionally, if you have filed some years but not others, you may struggle to make payment arrangements on your tax debt. Generally, the IRS only approves payment plans or offers in compromise if you have complied with the last six years of filing requirements.
What to Do if You Haven’t Filed in Years
If you haven’t filed in years, contact a tax professional to help you get caught up. Depending on the situation, they may recommend that you file the last six years of returns, or they may steer you toward the voluntary disclosure program. The IRS suggests talking with a tax expert before filing under the voluntary disclosure rules.
Then, start gathering your financial records. Contact old employers and financial institutions for records. If you own your own business, start looking through your account records for income and expense information. You can get some old income documents by requesting transcripts from the IRS website.
Tax returns involve a lot of numbers, but back taxes go beyond the numbers. People tend to experience fear, stress, or even anger when they haven’t filed in a long time. That can be very overwhelming, but it’s a lot easier when you have an experienced tax professional in your corner.
How to Pay the Bill From Unfiled Tax Returns
One of the biggest reasons people tend to ignore old tax returns is because they want to avoid facing the bill. They’re worried that if they file, they’ll owe tens of thousands or even hundreds of thousands or millions of dollars. They often think that it’s “safer” just to stay off the IRS’s radar.
That’s not the case. It’s almost always better to come clean and file your back taxes. There are many different payment options for people who owe the IRS, including the following:
- Installment Agreement — You pay at least $25 per month until you pay off the balance in full or the debt is written off.
- Offer in Compromise — You give the IRS detailed information about your assets and income. Then, if you pay an amount determined to be your “reasonable collection potential,” the agency settles the remaining balance.
- Currently Not Collectible Status — You don’t have enough money for monthly payments or a lump sum settlement. In this case, the IRS marks your account as not collectible, and you don’t have to worry about collection actions (unless your finances improve).
Additionally, there is a partial pay payment installment agreement which combines several elements of a payment plan and an offer in compromise. In all cases, regardless of the payment plan you use, you should also apply for penalty abatement.
Here are answers to the questions we often hear about unfiled taxes. If you have additional concerns, contact us directly.
How many years back can you file taxes?
Theoretically, you can file back taxes from any year. If you haven’t filed in over 20 years and you send in a tax return from the 1990s with a payment, the IRS probably isn’t going to send the return or the payment back to you. The agency will gladly take your money. Luckily, however, in most cases, you only need to file the last six years if you get behind.
What happens if you don’t file taxes for two years?
If you owe taxes, you will incur a late filing penalty of 25% of the balance for any year that is five or more months late. If you were due a refund, you still have time to file and claim it.
What happens if you don’t file taxes for five years?
If you don’t file taxes for five years, you will forfeit all refunds that are more than three years old. You also put yourself at risk of the IRS assessing interest and penalties against you. Don’t get stressed out and give up, however — it is possible to get caught up.
What if I haven’t filed taxes in 10 years or 20 years?
Generally, if you haven’t filed in 10 to 20 years, the IRS will only make you file the last six years of returns. However, the agency may make you file older returns if you owe a substantial amount or if fraud is involved.
What happens if you never file taxes?
If you never file taxes, you can miss out on thousands of dollars of tax credits every year. If you owe, the IRS will eventually find you and assess taxes and penalties against you. You may even face criminal charges if you didn’t file due to evasion.
How many years can you go without filing taxes?
If you don’t have a filing requirement, you can go your whole life without filing taxes. However, if you were supposed to file and didn’t, the IRS will eventually find out, and you can face significant consequences.
Even if you never get caught, not filing tax returns can compromise your financial life by making it hard to take out loans, buy a home, or get some types of jobs.
How far back can the IRS go for unfiled taxes?
There is no time limit on how far back the IRS can go if you have unfiled taxes. The statute of limitations to audit a tax return is usually three years, but there’s no time limit if the return was never filed. Yes, that means the agency could theoretically ignore the situation for decades and then start assessing old tax debts against you.
Can you go to jail for not filing taxes?
Yes, you can go to jail if you haven’t filed in an attempt to evade taxes, but even in tax fraud or evasion cases, the IRS generally levies civil penalties. Criminal prosecution is possible, but it tends to be relatively rare.
Every year, there are a few hundred people sentenced for criminal tax evasion. While that number may sound high, it’s extremely low considering how many taxpayers are in the country.
Get Help With Unfiled Tax Returns
At Wiggam Law, we help taxpayers with many different tax issues and a wide range of debt levels. We have saved some clients hundreds of thousands of dollars by helping them to catch up on unfiled returns. But we can also help you file a return to get a refund. The best approach varies based on your situation.
For instance, if you’ve been audited, we may help you contest the audit assessment to reduce the balance due. Then, we may look into penalty abatement and tax settlement programs like an offer in compromise. If the IRS hasn’t noticed your unfiled returns yet, we may help you apply for the voluntary disclosure program. This lets you get back into good standing with the IRS without worrying about too many penalties or other consequences.
Want to talk about the best approach for your situation? Then, call us at (404) 233-9800 or fill out our online contact form to schedule a consultation today. The experienced tax attorneys at Wiggam Law look forward to helping you get caught up on your tax returns and regain your peace of mind.