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What’s the Penalty for Failure to File Taxes?

Dec. 15, 2015
Income Taxes, Personal Taxes, Taxes
What's the Penalty for Failure to File Taxes?
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If you haven’t filed a tax return in several years, the first advice you’d get from any tax expert is to file your past returns as soon as possible.

While the government has just six years to charge you with criminal tax evasion, it has forever to collect the taxes you owe and assess penalties.

The consequences can pile up:

  • A failure-to-file penalty: If you owe taxes, a delay in filing your return could add a “failure to file” penalty — also known as the “late filing” penalty — to your tax bill. Between penalties and accompanying interest charges, your tax bill could increase by 25% or more.
  • A failure-to-pay penalty: If you don’t pay the taxes you owe by the deadline, the IRS can penalize you 0.5% of the unpaid balance every month.
  • Interest: On top of the failure-to-pay penalty, interest accrues on your unpaid taxes. The current rate is 4%, compounded daily.
  • A substitute return: If you fail to file but the IRS has the information needed to calculate your taxes, such as your W-2 form, you may be notified by mail that it has filed a return on your behalf. It won’t consider the exemptions, credits and deductions you would have taken, either.
  • Lost refunds: If filing a return would have resulted in a tax refund check for you, you won’t have to face a penalty, but you’re missing out on getting the money you’re owed. In most cases, the IRS gives you a three-year window to file previous years’ returns. Once this window closes, you’re no longer eligible to receive the refund.
  • Lost tax credits: When you lose the right to claim your refund — three years after not filing a return — you also lose the right to claim any credits, which include any overpayments you might have made for estimated or withholding taxes.

Three good reasons to file back taxes

Get access to aid and loans: Besides squaring up with the federal government, getting up to date on your tax returns gives you access to programs like federal aid for higher education, which require applicants to submit copies of their tax returns in the qualification process. Similarly, banks and other lending institutions require you to furnish copies of your tax returns for mortgages or business loans.

Get your full Social Security and Medicare: Filing your tax returns acts as an investment in any future payments you might be entitled to from the Social Security Administration or Medicare for retirement or disability. Your reported income to the IRS is the foundation for the benefits you will receive. Your returns are the foundation for access to state benefits, too, including unemployment insurance.

Be in the clear sooner: Finally, filing your previous years’ returns also starts the clock on the statutes of limitations. The IRS has three years from the date you finally file to audit you. The IRS has 10 years to collect the tax, interest and penalties you owe. And you can’t include your back taxes in a bankruptcy until at least two years after the return has been filed.

Penalties even if you’re months late

If you’re only months behind, rather than years, filing late still can be costly.

If you miss the April tax filing deadline, you might face a failure-to-file penalty. That’s 5% of unpaid taxes for each month that a tax return is late, up to 25% of the unpaid amount you owe.

The failure-to-pay penalty is 0.5% of your unpaid taxes for each month your outstanding taxes are unpaid. Add interest on top of that.

You can request an automatic filing extension. The extension period only covers your return, however. If you owe taxes, you’re obligated to pay them by the April deadline.

The failure-to-file penalty is larger than the failure-to-pay penalty, so it’s cheaper to file a return even if you don’t have the money to pay the taxes you owe.

What if you can’t pay what you owe?

Of course, you should pay what you can if you owe taxes when you file your previous years’ returns. It will reduce the amount of penalties and interest you owe.

But if you can’t pay it all, immediately contact the IRS to make arrangements to pay. The IRS may:

  • Give you a short-term extension to pay, up to 120 days. There’s no fee, but the late-payment penalty and interest will accrue.
  • Allow you to pay in installments. With this option, the IRS will charge you a one-time user fee of $120, which covers the request to enter the installment agreement. The fee drops to $52 if you agree to a direct debit payment plan.
  • Grant you a temporary delay on collection. If the IRS determines you can’t pay any of your tax debt, the agency could report your account as currently not collectible, temporarily delaying collection efforts. The delay is only a delay. It doesn’t cancel the debt altogether. Your tax debt still accrues penalties and interest until you pay in full. The IRS might also file a Notice of Federal Tax Lien to protect the government’s interest in your assets.
  • Consider making an “offer in compromise” for less than the full amount of the balance due. The offer in compromise is an option if your tax bill is so large that you don’t believe you’ll ever be able to pay off the entire amount, or paying the full amount will cause financial hardship. The IRS has pre-qualifying information on its site.


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