The Dangers of Failing to File

Failing to file a tax return can lead to serious consequences. Taxpayers that do not file their tax returns before the filing deadline face penalties and interest on the taxes owed. The penalty is charged every month on the total back taxes. Due to the accumulation of penalties and interest, the amount of unpaid taxes increases substantially with time.

Penalty For Non-Filing

Failure to file a return and failure to pay taxes are different kinds of non-compliances and are handled separately by the IRS. The penalty for failure to file a return is 0.5%. However, the penalty for non-payment of taxes is 5%. In addition to penalties, the IRS also charges interest, which is charged at the federal short-term rate plus 3 percent for a year. Interest is compounded daily.

Extension to File

If you believe that you might not be able to file your tax return before the filing deadline, you may apply for an extension. Requesting an extension automatically gives you six more months to file. If obtaining an extension, it is important to pay taxes before the filing deadline. An extension to file does not mean an extension to pay. Therefore, to avoid penalties and interest, it is vital to pay taxes on time.

IRS Collection Actions

Failure to file can lead to collection actions by the IRS such as wage garnishment, bank levy, and lien if taxes are not paid on time. The IRS files a Substitute for Return to determine their tax liability (SFR) when they do not receive a tax return of a taxpayer. After filing the SFR, the IRS begins to collect the taxes owed.

The first step in the collection the IRS takes is to send notices to request payment of back taxes. If the notices go unanswered and back taxes are not paid, the IRS proceeds to lien. After the lien, if no resolution is achieved, the IRS places a levy to recover the unpaid taxes.

Tax Resolution Methods

If a taxpayer did not file a return during the filing season, they can file their return even after the IRS has filed the substitute for return. Along with filing the return, the taxpayer also needs to pay the full amount of taxes. Taxpayers who cannot pay the full amount of taxes owed can use IRS payment plans, submit an Offer in Compromise, or seek other tax relief, such as Currently Not Collectible.