Failing to file a tax return when you owe taxes can land you in hot water with the IRS, as it is illegal. On top of the threat of legal action, the IRS can and will fine you for your tardiness.
The minimum penalty for failing to file within 60 days of the due date $210 or 100 percent of your unpaid taxes, whichever is less. The failure-to-file penalty grows every month at a set rate, which changes as per tax law. In 2020, the rate is 5% of your tax debt per month, maxing out at 25% of your total tax debt.
Even if you don’t owe a large tax bill, failing to file tax returns triggers late filing penalties that grow rapidly over time. The IRS may assess fines based on what they estimate from your tax obligations, not your actual income.
Many taxpayers are unaware that unfiled returns can lead to missed tax credits and unexpected back tax bills. Filing all required tax returns can reduce penalties and restore your eligibility for benefits.
If you fail to file your tax returns for several years in a row, it may be interesting to know that the IRS could have been filing returns for you. That means you do have a tax debt that continues to accrue interest over the years, and because you haven’t been doing your taxes, the IRS simply takes the income it assumes you’ve earned and doesn’t apply any eligible deductions.
Furthermore, if you haven’t ever sent in an income tax return, it’s important to note that there is no statute of limitations for how far back the IRS can audit you.
When it’s clear that you owe substantial taxes and have unfiled tax returns, the IRS will likely investigate your account. It is to those individuals who deliberately fail to comply with their obligation to file required tax returns and pay any taxes due and owing that IRS Criminal Investigation devotes its investigative resources. In the most egregious cases, criminal prosecution is recommended to the United States Attorney’s office.
Most states in the United States require that taxpayers file state income taxes, separately from their federal tax returns. While the IRS has its system for penalizing and investigating late tax returns, states also legally require their citizens to file taxes on time – and failing to do so can get very costly. Penalties usually mirror those imposed by the IRS, with minor variations from state to state. States are typically also more aggressive in their collection tactics.
State tax problems can occur if you have unfiled tax returns in the state where you reside. States can prosecute taxpayers for failing to file, particularly if they believe that your failure to file your income taxes is due to criminal activity.
Alternatively, your penalties and fees will continue to accrue until the state government decides to apply liens and levies (garnishing wages and claiming property), just like the IRS, to cover your state tax liability. Other penalties include applying restrictions to your professional licenses, revoking certain registrations, and more.
Note that not all states have income taxes. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no income tax, and both New Hampshire and Tennessee do not tax wages. If you live in one of the other 41 states, however, you must file your state income tax return or face penalties.
