For hundreds of millions of Americans, April 15 is a day to dread—no one enjoys filing their taxes, but it’s an unavoidable part of life. The consequences can be severe for those who fail to file or pay their taxes. In addition to significant financial losses, taxpayers risk losing their assets and being in poor standing with the IRS, which is its own source of stress.
Learn more about what happens if you don’t file or pay your taxes. Ready to get back on track? We can help. Call Wiggam Law at 404-609-1300 to set up a time to meet with one of our experienced tax attorneys.
IRS Requirements for Filing and Paying Taxes
The IRS requires the vast majority of taxpayers to file by April 15 (or the next business day if April 15 falls on a weekend) and pay all taxes due at that time. Certain individuals are exempt from filing tax returns, including those who earn less than the standard deduction for their age and filing status, as long as they don’t meet any of the other filing requirements. However, in these situations, it still often makes sense to file a tax return, as you may be leaving a tax refund on the table.
If you are legally required to file a tax return and you are unable to do so by April 15, you can file a form to request an extension until October 15. To do so, you must estimate your tax liability and pay any amount due. This is often beneficial for those who are unlikely to need to pay in but do not have the time to do their tax return by the due date.
Even if you cannot afford to pay the tax bill in full, filing an extension reduces the penalties you’ll face for unpaid taxes. By requesting an extension, you avoid the failure to file penalty, which can be much higher than the failure to pay penalty. If you don’t do an extension, you’ll incur both of these penalties, and they can get up to 50% of your balance.
Should You File If You Can’t Pay in Full?
This is one of the most common questions that tax attorneys and preparers hear. In fact, one of the main reasons that people don’t file on time is because they cannot afford to pay their tax liability. This is an all-too-common mistake that costs taxpayers hundreds or even thousands of dollars. The IRS wants you to file your return on time, even if you cannot pay what you owe. They are pretty flexible regarding payment plans and alternate payment arrangements, but if you do not file your taxes, they have nothing to work with.
In short, yes—you should file your taxes by the due date every year. If you cannot pay what you owe, you can make plans to pay when you file. When you learn more about the penalties of failing to file and pay, you’ll see why filing on time is beneficial.
Penalties You May Face When You Fail to File or Pay
The IRS may assess two separate penalties when you do not file or pay your taxes on time. These penalties are broken down on the notices and bills you receive in the mail, but knowing about them ahead of time can help you prepare.
Failure to File Penalty
When taxpayers owe taxes but do not file their tax return, the IRS assesses a failure to file penalty. This is a sizable penalty—5% of the total amount owed for each month or part of a month that you fail to file your tax return. It reaches its cap when your return is five months late, as it cannot be more than 25% of the total amount you owe.
What if you don’t owe taxes? There is no technical penalty for failing to file—but if you would be owed a refund (and you likely would if you don’t owe), you’re basically giving up money that you lent to the IRS during the year through your income withholdings and/or tax credits that you earn based on your situation. That’s basically its own penalty.
Failure to Pay Penalty
The failure to pay penalty is far smaller than the failure to file penalty. It is just 0.5% of the amount you owe, but this amount is added to your tax bill for each month or portion of a month in which you continue to owe the IRS. When you compare this to the size of the failure to file penalty, it’s easy to see why you should always file on time, even if you cannot pay; you’ll pay a far heftier penalty for not filing than you will for not paying on time.
If you do not address your overdue taxes by setting up a payment plan or otherwise applying for assistance, the IRS will become more persistent in its collection efforts. If it gets to the point of a notice of intent to levy and you still have not paid, the penalty jumps to 1% ten days after the notice is sent.
How These Penalties Pile Up
Clearly, these penalties can quickly snowball out of control and make your tax bill even more overwhelming. Most people don’t fail to file because they don’t care about the law; most people don’t file because they just don’t have the money to pay.
Unfortunately, failing to file only makes this problem worse. After just five months, your tax bill has already increased by 25% because of the failure to file penalty. The failure to pay penalty will continue increasing until it reaches 25% of your total bill.
In addition, the IRS charges interest on both the original amount due and any penalties added to your bill.
When Collection Actions Escalate
If ignoring the tax return due date is a bad course of action, ignoring further communication attempts from the IRS is even worse for your financial well-being. Once the agency knows that someone owes them money, they don’t give up; ignoring their letters only gives your penalties and interest more time to add up. It does take quite a bit of time for them to take aggressive action, and you receive many notices before it gets to that point. You should reach out immediately to minimize what you owe and give yourself the best shot at an agreeable payment solution.
- Liens – While the filing of a lien itself does not actually involve seizing your property, it does involve the IRS staking their claim on your property. This essentially gives them the right to collect what they are owed from the sale of that property or through foreclosure.
- Levies – Levies are one of the worst outcomes for those who owe the IRS money. When the IRS levies your assets, they take ownership of your assets and sell them to get the money you owe them. They can levy all sorts of assets, including your home or other real estate, vehicles, savings accounts, and even retirement accounts. You receive multiple notices before they take action and levy your assets, but once a levy is initiated, it is incredibly hard to reverse.
- Wage Garnishment – The IRS can also garnish your wages if you do not pay your taxes or make other payment arrangements. This is an outcome you want to avoid at all costs. You probably know that other creditors are limited in what they can garnish, as they are legally obligated to leave you enough to live on. The IRS doesn’t work under the same principles as other creditors. Depending on the type of income you earn, they may be able to take the vast majority of your paychecks to pay off your debt. They have much more leeway than other creditors, and stopping a garnishment order is difficult and stressful.
Will You Go to Jail for Not Paying Taxes?
For many people, this is the first thought that comes to mind when they get a collection notice or past-due notice from the IRS. Everyone knows the IRS is serious about collecting what they are owed, and so there’s a misconception that the agency is quick to jail non-payers. This simply is not the case. The majority of people who aren’t paying their taxes aren’t doing so because they are trying to evade responsibility or hide their criminal activity. They’re not paying because they genuinely cannot or they don’t know how to get back on track financially.
When someone doesn’t pay simply because of their financial circumstances or negligence, the IRS does not seek criminal charges against them. They will, however, gradually ramp up their collection actions so they eventually collect what they are owed.
When is not paying taxes a crime? When someone intentionally does not file their tax return or pay their taxes because they are defrauding the IRS, that is a crime. The penalties for defrauding the agency are heavy; in addition to paying what you initially owed, you’ll have to pay heavy penalties and interest. Going to jail is also a very real possibility.
What to Do If You Cannot Pay in Full
What should your next step be if you file your taxes but you can’t pay your tax liability? It’s a good opportunity to look into alternate payment arrangements offered by the IRS. You may want to explore these options and see which ones best fit your financial circumstances.
Installment Agreement
The IRS generally prefers this option, as it eventually results in your entire tax bill—plus interest and partial penalties—being paid. You can choose between a short-term plan lasting up to 180 days and a long-term plan lasting up to 120 months. When you apply, calculate a monthly payment amount that comfortably fits your budget. Missing a payment can land you in trouble with the IRS and result in you being charged a reinstatement fee. In some cases, you are required to use a direct debit payment plan; even if you’re not, doing so can help you save money on penalties. If you go this route, ensure that you are able to pay all future tax liabilities in full by the due date. Incurring additional tax debt can void your payment plan.
Offer in Compromise
An Offer in Compromise may be the way to go if paying your taxes in full would create a financial hardship. This is the option you’ve heard about if you’ve heard tax attorneys brag about settling tax debt for pennies on the dollar; in reality, the IRS will only accept an Offer in Compromise if it accurately reflects the most you can comfortably pay.
Partial Payment Installment Agreement
Like an installment agreement, a Partial Payment Installment Agreement requires monthly payments. It’s solely for those who are unable to make the payments needed to pay their tax debt in full. You make monthly payments until the Collection Statute Expiration Date, and at that point, the IRS cannot collect anything else that you owe from that tax debt.
Currently Not Collectible Status
CNC status is reserved for taxpayers who are unable to make any payments toward their tax debt, including both one-time payments and monthly payments. This option does not forgive the tax debt, and in fact, the IRS will occasionally check back in with you to see if your financial circumstances have changed. At that point, they will resume collection efforts.
How to Stay Compliant After Getting Caught Up
After deciding how to handle your current tax debt, it is crucial to set yourself up for future success by ensuring compliance with IRS requirements. You may want to start by figuring out how you got into tax debt in the first place.
If you have a W2 job, your withholding number may not be enough to pay your taxes in full through your paychecks. You can discuss the appropriate number with your tax professional to ensure you don’t end up with a tax bill at the end of each year. If you are self-employed or otherwise untraditionally employed, you likely have to make quarterly estimated tax payments.
Your tax filing professional can help you calculate and pay these taxes throughout the year to avoid unpleasant end-of-year surprises.
Are you looking for more personalized assistance for your unfiled taxes or past-due taxes? The team at Wiggam Law is committed to helping taxpayers like you. Schedule your consultation online or call us at (404) 233-9800.