Not filing taxes for several years could have serious repercussions. Not only can the IRS stop you from applying for a passport or a mortgage, but they can also create a Substitute for Return against you, charge you for failure to pay, or charge you for failure to file.
Before you panic, let’s take a look at what could actually happen and how you can mitigate the chances of the worst of the punishment.
If you’re wondering how the IRS knows how much you owe since you haven’t filed, it’s because the IRS will file a Substitute for Return (SFR) on your behalf. However, it will be filed as single or married filing separately. You will not receive any exemptions or deductions that are rightfully yours.
Once the SFR is filed, you are sent a notice to accept the tax debt as filed in this form. With no response, the IRS issues a notice of deficiency. After that, you owe tax, and the agency starts the collection process. They could place a levy on your wages or bank account. The IRS also has the option of placing a federal lien against your property.
Short and Long Term Consequences of Not Filing for Ten Years
There are several things you may need over the course of your life that require you to show tax returns:
- Application for a mortgage.
- Application for a passport.
- Application for student financial aid.
- Application for healthcare insurance.
- Credits toward Social Security retirement or disability benefits.
There are more, but you get the idea. Your tax returns are part of the documentation required for a variety of financial dealings. You don’t have them, you don’t get the loan, passport, or whatever else you need.
Other things that could, and probably will happen include the IRS charging you with failure to file and failure to pay. Each of these charges contains its own penalty, although failure to pay carries a heavier burden.
The worst that could happen is that you could go to prison for tax evasion, which can be as much as five years and $250,000 in fines.
Get Your Act Together
What you need to do is rectify the situation as soon as possible. Prepare to file all your returns and face the music.
- Locate and gather the financial records required for each return. That means W-2’s, 1099’s, and anything else you need to fill out your forms. If you can’t find something, ask the IRS for a copy.
- Either prepare your returns yourself or seek assistance from a tax professional. It may sound self-serving for us to say it, but a tax professional is probably the better idea.
- Remain seated while learning how much you owe the federal government.
All those SFRs the IRS filed for you? Refiling your taxes will supersede those, so at least you can get your exemptions and deductions back. There is no time limit for submitting unfiled returns. There is also no limit to how long the IRS has to collect.
We won't soft-peddle it. Between the fees, penalties, interest, and back taxes, you may be looking at quite a bit of money to pay.
Fees, Penalties, Interest, and Back Taxes
Yep. You will owe more than the taxes you didn’t pay on time. You will also be required to pay penalties for non-compliance… there’s that failure to file and failure to pay penalty. You owe fees on the unpaid portion of your tax bill. Also, the IRS charges 3% interest on the amount you owe for every year you don’t pay.
Finally, there is the tax you owe for each year. It can all add up to a pile of money. However, there is a way to get some relief.
For the IRS, the bottom line is the bottom line. The agency would prefer you to cooperate, negotiate, and pay as much as you can, in preference to sending you to jail. Of course, even after you pay the money, the IRS still has three years to charge you with a criminal offense. Still, it's unlikely they would do so if you go along with everything and continue to toe the line.
The first thing to do is to admit you made a mistake and you are prepared to pay your dues, as it were. Then keep in touch with the IRS to show you really mean to go straight and get things squared away.
You have several options for paying your tax bill and attendant penalties, fees, and interest:
- Take the funds from savings, but not your retirement accounts.
- Make a partial payment to cut down the size of the bill and the amount of interest accruing.
- Ask for a payment extension or an installment plan. Payment extensions allow you an additional 120 days to pay. Installment plans are requested through IRS Form 9465, Installment Agreement Request. Payment plans for up to six years are available. Keep in mind interest continues to accrue on the unpaid amount. There may also be a set-up fee.
- Ask for leniency due to hardship or request a reduction in your tax bill using an Offer in Compromise. You must prove the tax bill will cause you a tremendous burden, like having to sell your home, for the hardship case. For Offers in Compromise, you need to file all your tax returns. You will have to finish filing your ten years’ worth of taxes to use this remedy to settle your tax debt for less than you owe. Understand that an Offer in Compromise is a long shot; very few are granted.
Stay Current and Plan for the Future
Once you have all of your taxes filed, all eleven years (don't forget this year’s taxes), plan ahead to avoid this issue in the future. Talk to a tax expert about your withholdings and whether making quarterly payments would make sense for you.
Learn from your decade-long mistake. Keep up with your federal and state taxes. Wishing you didn’t have to pay them doesn’t make them go away. So stay off the agency’s radar and pay your taxes every year, on time, and in full.
If you need help, call Top Tax Defenders. We are the tax superheroes.