What are the consequences if you fail to file a return?
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UPDATED: Jul 15, 2021
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Most taxpayers must file an income tax return. The failure to do so will result in serious penalties. Taxpayers with incomes that fall below certain thresholds are exempt from filing, but are encouraged to file an income tax return anyway as certain tax credits could result in the taxpayer receiving money back through the earned income credit.
Whether you have to file is determined by guidelines set by the IRS. In 2016 tax year, single taxpayers under the age of 65 whose gross income is at least $10,300 must file a federal income tax return. Married taxpayers under the age of 64 who file jointly and earn at least $20,600 are required to file an income tax return.
Failing to file an income tax return can result in serious penalties.
Taxpayers that fail to file an income tax return face up to one year in prison for each year they fail to file a tax return and fines up to $25,000. Typically, the IRS has up to six years to pursue prosecution of those taxpayers who fail to file a tax return. For those that fail to file an income tax return, the IRS will initiate a Taxpayer Delinquency Investigation. However, the IRS will attempt to contact the taxpayer by phone, letter, and a visit from an IRS agent. If the IRS fails to get in touch with the taxpayer, a deadline will be set by the IRS for the taxpayer to file a return and a written notice communicating this deadline will be sent to the taxpayer at the last known address. An agent may make a final attempt to contact the taxpayer in person. Taxpayers that fail to file a return and fail to respond to the IRS will most likely become the subject of a criminal investigation.
If you are frustrated with your tax situation and possible taxes that you may owe, simply refusing to file an income tax return is not the solution. Take the following real life experiences of two taxpayers who faced serious consequences simply because they buried their heads in the sand and ignored the tax man.
One taxpayer, a male, in his mid-30’s, had been receiving polite letters from the IRS for more than 10 years because he had not been filing income tax returns. The letters were polite because the IRS believed he was likely due a refund, and since the opportunity for a refund expires after three years, they were more than happy to keep his refund. However, in one of the more recent years he owed taxes; therefore the IRS started seriously putting the pressure on for him to get his taxes filed. The IRS told him that he owed $23,000; he filed 10 years of tax returns shortly thereafter.
For the first 7 of those years he would have had a refund, but because the opportunity for those refunds had expired, he actually threw away almost $15,000 dollars. For the year that he owed, his tax liability ran around $7,000 dollars, but due to interest and penalties that amount jumped to a whopping $12,000. His failure to file, in the end, cost him about $20,000 dollars, over and above the $7,000.00 of tax that he would have owed.
Passivity hurt another taxpayer who also had not filed a tax return for over 10 years. His reason for not doing so was extremely foolish. For the last tax return that he had filed, his refund was seized by his state child support agency for back child support, so he simply chose not to file any more returns. He compounded his error by claiming a large number of exemptions on his W-4, so his employer was withholding little to no federal tax. When the IRS finally forced him to file his returns, he owed over $45,000 in back taxes. The taxpayer is not a high wage earner; therefore he will be paying back the IRS for most of the rest of his life.
Consulting a tax professional or tax lawyer is an anxiety-producing chore and one we would rather avoid. But if you have not filed in some time, and are in serious jeopardy, it may be advisable to talk to a tax professional or a lawyer.