Failure to file taxes can lead you to hot water with the IRS, but what happens if you don't file taxes for 5 years?
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If you’ve ever failed to file your taxes, you’re sure to have received a notice from the IRS detailing the penalty you have to pay as a result of your late filing. But have you ever wondered what happens if you forget (or fail) to file for multiple years?
Surprisingly, the answer might be nothing – at first, at least. The IRS generally isn’t fond of taxpayers who don’t pay their fair share or provide the required paperwork for the tax system to function. Tax returns are part of how the IRS cross references information across large populations to find red flags and reduce the tax gap.
But just because the IRS doesn’t come down hard on some taxpayers who haven’t filed for years doesn’t mean that there are no consequences at all – or that you can fly under the radar forever. The IRS doesn’t forget. But it can forgive, if you play your cards right.
The IRS Doesn’t Forget
It’s important to mention that the IRS does not necessarily need you to file anything to know what you’ve earned, at least roughly. The IRS uses information returns filed by employers, banks, and other institutions to determine what you owe in taxes, and it will receive that money either through withholding or your monthly payments.
You can (and should) make these payments even if you don't file taxes for 5 years. If the IRS discovers that you’re earning elsewhere – through reports from the bank or returns filed by other people – their software can pick up on that discrepancy and will call it out as a red flag. When faced with options for unpayable tax debts, it's crucial to explore all available avenues, such as installment agreements or offers in compromise, which can provide relief. Engaging with a tax professional can also help identify potential strategies to manage your liabilities effectively. Taking proactive steps can significantly reduce the stress associated with overdue payments and help regain financial stability.
You May Have Had a Return Filed for You
If you fail to provide the IRS with the information they need to make the pieces fit together, they will file a substitute return for you based on the information they have. This means that you won’t have any deductions or tax refunds applied to the income the IRS will report for you. Think of it as a passive aggressive statement – because you aren’t filing, the IRS takes your paperwork, says “fine, we’ll do it for you”, and gives you just about the worst possible deal it can.
On top of that, your tax account will carry a penalty.
Understanding IRS Penalties
There are two major IRS penalties: a failure to pay penalty for any outstanding tax balance, and a failure to file penalty whenever a tax return is significantly overdue.
If you fail to file, the IRS gives you a flat penalty to start, and adds 5 percent of what your unpaid tax bill every month your return hasn’t been filed, culminating at a 25 percent maximum after five months. In addition to the penalties for late tax filings, failing to pay on time can also lead to interest accruing on the outstanding balance, further increasing your total amount owed. It’s crucial to address any tax obligations promptly to avoid any further financial strain. Many taxpayers find that seeking professional help or utilizing online resources can make navigating these complexities easier.
Depending on how hefty your estimated tax bill is, the IRS will pursue collection actions against you. If you don't file taxes for 5 years, expect collections to be reaching out.
Why You Should File Your Old Returns Anyway
Despite the IRS filing for you, these substitute tax returns still don’t count as the real thing. If you have a tax bill – and you do, because of the penalty and accumulated interest – you will eventually need to pay off that tax bill.
When you decide to do so, the IRS will usually not accept any payment plans or offers until your tax returns are in order. That means you will have to get your paperwork straight first, before you can wipe your debt.
Settling Your Debt with the IRS
Once you’re in the position to make things right, you will want to start by getting caught up as quickly as possible. Thankfully, if you work with tax professionals, this will not take too long.
Start with the most recent year and work your way backwards. You can file this year’s late return electronically via the IRS’ website, where you will also find all the information you will need to file returns you haven’t kept very good records on, via the IRS’s transcript records. When it comes to filing requirements for nonresidents, it's essential to understand the specific obligations based on your residency status. Many states have unique rules that can affect how nonresidents file their taxes, so research is crucial. Consulting the appropriate tax authority or a professional can help ensure compliance and avoid potential penalties.
You can basically ask the IRS to send you the information they have on you, combine it with what you know or have left in your records, and create an accurate tax return for years you’ve missed. To do so, you will need to fill out Form 4506-T. Keep in mind that it can take well over a month for the IRS to finish processing your request.
As you work your way through your returns, you will be able to start negotiating a payment plan with the IRS. You can do so either in a single transaction, in a short period (via multiple lump sums), or monthly (until it is done). If your tax debt is quite large, you may have other options you can explore with a tax professional.
What Happens If You Don’t Pay?
Willfully ignoring your duty as a taxpayer theoretically can be a criminal offense. However, it’s more likely that if the IRS hasn’t done anything at this point, they will continue to let interest rack up on your tax account until they come knocking and demand payment – as well as the overdue tax returns.
If you refuse to pay, the IRS has multiple different ways of turning up the heat without threatening imprisonment. The first is through a tax lien. A federal tax lien effectively blocks you from accessing certain forms of financing by making the government itself the top priority creditor in line for your money. This applies to every asset and account in your name. This also means you cannot seek a secured loan or use anything you own as collateral for financing.
From there, the IRS can turn to tax levies as its next step. A tax levy is a physical claim of an asset or account, and everything therein, for the purpose of repaying your tax debt. The IRS cannot claim the home you live in, nor any assets you strictly need to survive, but they can take certain properties and clean out certain accounts.
Any action the IRS takes must first be announced via the mail. You will receive multiple different letters and notices as the IRS proceeds to place a lien and levy on your tax account and belongings. Only by repaying your debt, taking them to court, writing an appeal to the Independent Office of Appeals, or becoming Currently Not Collectible can you keep the IRS from levying further collection actions against you.
If you are worried about trouble with the IRS due to being behind on tax returns and tax payments, know that time is of the essence. If you don't file taxes for 5 years, or any amount of time, get in touch with us today at Rush Tax Resolutions, and get your situation sorted out quickly. It's important to stay informed about tax extension dates for 2023 to avoid any penalties. Missing these deadlines can lead to additional stress as you navigate your financial obligations. Let us help you understand your options and create a plan that works for you.
