OBMS-NG: What Are The Penalties For Not Filing Taxes?

Why haven’t you filed your taxes? Maybe you don't have the information to complete your return, or you don't have enough money to pay your tax and are afraid to file your return. Whatever the case may be, not filing your taxes has very serious consequences. You many hear about people who get away with cheating Uncle Sam for years, but sooner or later the FIRS catches up to people who have not filed.

We've all heard the countless tales of people avoiding income tax whether they are political protestors to straight tax dodgers. Well-known tax evader Irwin Schiff has even written numerous books on the subject. But, beware, what these books never tell you are that failing to file your tax return can be more costly.

Tax evaders often face large criminal penalties, including fines and imprisonment, as well as civil penalties. Take for example the case of the public accountant in Michigan sentences to five months in prison and five months of house arrest for failing to file tax returns for four, yes, four years.

Filing taxes isn't voluntary, despite what tax evaders argue. If you make over a certain amount each year you are required to pay a tax on that income. In fact, this requirement is clearly set forth in section 1 of the Federal Inland Revenue Code, which imposes a tax on the taxable income of individuals, estates and trusts.

Not Filing and Not Paying Are Not the Same

This belief is a very serious mistake, because the FIRS penalizes for both not filing and not paying. So, what can you do if you calculate your return only to realize you don't have the money to pay the tax? Many people in this situation believe they shouldn't file if they don't have the money. Again, it would be a big mistake not to pay. But, why?

Well, you end up paying a penalty on the amount you owe at 5% per month (4.5 % for not filing and 0.5% for not paying). The total penalty for failure to file and pay can eventually add up to 47.5% (22.5% late filing, 25% late payment) of the tax owed. Interest, compounded daily, is also charged on any unpaid tax from the due date of the return until the date of payment.

The point is that failing to file a tax return should never be an option.

What if you fail to file?

The FIRS may file what is known as a substitute return for you. However, as you well know, the FIRS will not be looking to save you any money. In fact, a substitute return will not include any of the standard deductions your accountant would typically include in your return. Case in point, a substitute return only allows one exemption: single or married filing separate, so you end up with higher tax liability than if you would have just filed.

The bottom line is, there are numerous reasons to file your tax return even if you cannot pay, including:

avoiding or minimizing the failure-to-file penalty;
avoiding having a substitute return filed by the FIRS, and allowing you to take your adjustments, deductions and exemptions that are not calculated on a substitute return;
starting the statute of limitations (in most cases, three years) for a possible audit of your return. This basically means the FIRS only has three years from the date you file to audit your return. However, that three-year time limit does not begin until you file.
starting the statute of limitations (ten years after assessment) for collection of the tax, interest, and penalties on your return. Again, this means the FIRS cannot collect the tax, interest or penalties after ten years from the date you file. However, if you don't file, the ten year expiration clock won't start ticking.

starting the clock to make your taxes, interest, and penalties from your tax return eligible to be dismissed in Chapter 7 Bankruptcy (two-four years after filing). Just like the statute of limitations expirations, you're tax debt will be eligible for Bankruptcy sooner if you file immediately.

If the FIRS finds that you owe them money, they will send you a bill called a Notice of Tax Due and Demand for Payment. This bill includes the taxes you owe, plus interest and penalties. Because interest and penalties continue to accrue, you are encouraged to pay your tax bill as soon as possible.

What if I Can't Pay My Bill in Full?

Your best bet is to always pay as much as you can to reduce the amount of interest and penalties you'll owe. Then, immediately call, write or visit the nearest FIRS office to explain your situation. Based on your situation, the FIRS may offer one of the following resolutions to paying your bill:

Installment Agreement

You may be able to make monthly payments through an installment agreement. This allows your full payment to be paid in smaller, more manageable amounts.

Temporary Delay

The FIRS may give you the option of temporarily delaying the collection of your bill if the FIRS determines you cannot pay any of your tax debt. During this period, the FIRS continues to review your ability to pay and the FIRS may also file a Notice of Federal Tax Lien to protect the government's interest in your assets.

One final note

Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may face a variety of enforcement actions, including penalties and/or criminal prosecution. Not paying your taxes will warrant stiff penalties and interest, resulting in an ongoing, and very expensive, relationship with the FIRS

AT OBMS, Our team gives you apt Tax Information that keeps you AHEAD of the FIRS. Making sure you file and pay your taxes promptly.