Consequences of Not Filing a Federal Personal Income Tax Return: Penalties and More

Income taxes must be paid on funds above a certain level of income. Regardless of what some theorists may argue, filing taxes is not optional. In fact, failing to file a tax return when you make above a certain amount of money will result in criminal penalties including fines, liens, and even imprisonment. With the Internal Revenue Service being more flexible than ever in helping people pay their tax debt, there is no excuse to avoid filing. In fact, not filing will cost you much more than if you had filed and paid the amount owed.

The Law

According to the Internal Revenue Code, anyone making above the federally established tax exemption limit is required to file a tax return. This includes employees, employers, farmers, military personnel, students, and senior citizens.  See IRS Publication 501 which charts the filing requirements for most taxpayers. (There is one major exception to the table.  Taxpayers who are still legally the dependents of another person (usually their parents or guardians) must file at smaller levels of income.)

Consequences

The consequences for not filing your taxes snowball as time passes. For instance, delaying your filing past April 15th will automatically result in a fine of either $100 dollars or 5 percent per month of your taxes owed. If you continue refusing to file, the IRS will charge you 100 percent of your taxes owed and will not allow you any deductions or credits. This means that any perks for having dependents, giving to charity, or even paying interest on your mortgage are not considered.

Ignoring bills and notices from the IRS can lead to a determination of tax evasion. Tax evasion is a serious offense that will leave you with a court hearing, marks on your credit, and criminal record. Even worse, if found guilty of tax evasion, you will be fined up to $25,000 dollars and can serve up to 1 year in prison. All this could happen because you did not file your taxes.

Help

If you have earned above the exclusion amount and have not been filing your taxes for whatever reason, the first step should be to prepare tax returns for the years in question, with the help of a tax professional, and then determine the potential amount that you might owe.  If the amount is under $25,000 for all of the years combined, then file your tax returns, wait for bills from the IRS showing your total with interest and penalties and then apply for an installment arrangement with the IRS.  Doing this helps avoid the potential stigma of tax evasion and shows the IRS that you are making a good faith effort to become compliant.

If the IRS denies you an affordable installment plan, then it is time to consult with a tax attorney. A tax attorney can better help you in negotiating with the IRS and making sure that everything is handled in the most expeditious manner and cost effective manner.

If you have not filed a tax return for many years because you had issues in your life that caused you to miss a year or two, and then you buried your head in the sand, it is even more critical that you get those returns prepared and filed as soon as you can.  You may find that you actually were due refunds for some or all of the years.  A claim for a refund expires after three years, therefore time matters.

A Real Life Example:

A gentleman got divorced in 2004 and he was so upset about the divorce that he let the ball drop on quite a few important matters in his life, including filing his tax returns.  He finally pulled everything together and visited a tax professional and discovered the following:

2004    He would have had a federal refund of $1800.00
2005    He would have had a federal refund of $2200.00
2006    He would have had a federal refund of $1500.00
2007    He had a balance due of $3500.00
2008    He had a federal refund of $500.00
2009    He had a balance due of $300.00
2010    He had a federal refund of $1200.00

In this example the taxpayer lost federal refunds of $5500.00 for 2004-2006, and ended up owing the IRS a net amount of $2,100.00 plus interest and penalties for 2007-2010.  That is a lot of money to lose because you neglected to file your tax returns.

Case Studies: Consequences of Not Filing a Federal Personal Income Tax Return

Case Study 1: John’s Tax Evasion

John, a self-employed individual, consistently failed to file his tax returns for several years. He ignored bills and notices from the IRS, thinking he could avoid the consequences. However, the IRS eventually determined his actions as tax evasion.

As a result, John faced a court hearing, incurred marks on his credit, and now has a criminal record. Furthermore, he was fined up to $25,000 and sentenced to one year in prison. John’s situation serves as a reminder of the serious implications of tax evasion.

Case Study 2: Sarah’s Costly Neglect

Sarah, a divorced individual, let her personal affairs fall by the wayside, including filing her tax returns. When she finally sought professional help, it was discovered that she had missed out on significant federal refunds for the years she neglected to file.

For the years 2004 to 2006, she lost federal refunds totaling $5,500. Additionally, Sarah ended up owing the IRS a net amount of $2,100 plus interest and penalties for the years 2007 to 2010. This case demonstrates the financial consequences of failing to file tax returns.

Case Study 3: Mark’s Late Realization

Mark, a self-employed contractor, neglected to file his tax returns for multiple years due to various personal challenges and financial difficulties. He mistakenly believed that avoiding the filing process would alleviate his financial burden.

However, when Mark finally sought professional assistance, he discovered the true extent of his obligations. It was revealed that he owed a substantial amount in taxes, along with accrued interest and penalties.

As a result, Mark had to face the consequences of his prolonged non-compliance, including significant financial setbacks and added stress. This case study emphasizes the importance of timely filing and seeking professional guidance to address tax obligations promptly.