Paying taxes is a responsibility for citizens, and they should be aware of possible consequences. Nevertheless, many people don’t file taxes for even 10 years. They don’t calculate IRS penalties and interest of unfiled tax returns.
What about you? Are you asking, “I haven’t filed taxes in 10 years. What do I do?” Then, you’re in the right place. A simplified guide to get you through this one is here.
Why don’t people file their taxes?
Procrastination: Many taxpayers may think they have enough time. Or some of them may have already started the process but not completed it and missed the deadline.
Lack of knowledge: Some taxpayers don’t have a grasp of tax laws. It may seem complicated.
Financial hardship: People in financial hardship may not have the funds to pay for professional tax advice.
Personal problems: Illness, family emergencies, or other life events may take precedence, and tax preparation may fall to the bottom of the to-do list.
After a few years, they don’t know where to start: Sometimes, taxpayers may have missed filling out their taxes for a year. Then, they struggle to start over again.
Poor recordkeeping or no recordkeeping at all: Poor recordkeeping can make it difficult to complete tax returns correctly.
Consequences of not filing taxes
The IRS charges a 5% penalty for late tax returns for the Failure to File Penalty. The penalty could be up to 25% per month. Else? If you owe taxes and don’t pay them, the penalty is 0.5% of your unpaid taxes per month, up to a maximum of 25% of your unpaid taxes. It’s called the Failure to Pay Penalty. Besides, the IRS also charges interest (Interest Charges) on unpaid taxes and penalties.
What’s the worst-case scenario? Under the 7201 Code, the IRS may imprison you for up to 5 years, with a maximum fine of $250,000. What happens if you just don’t file for taxes?
If you haven’t filed taxes in 2 years:
Although the penalties don’t seem scary, the consequences can quickly get worse if you do nothing. Therefore, the penalties can be up to 25% of your unpaid tax liability.
If you haven’t filed taxes in 3 years:
The IRS allows a refund within three years. After that time, unclaimed refunds may be permanently forfeited. Besides, you can get higher penalties.
If you haven’t filed taxes in 5 years:
You’re at a higher risk. The IRS may file a Substitute for Return (SFR), often resulting in a higher tax liability. Such as tax garnishments or property restrictions, wage deductions, or the seizure of your assets.
If you haven’t filed taxes in 10 years:
The IRS might have already taken legal action against you. Worse, you may face tax evasion charges resulting in higher penalties or jail time.
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What happens if you don’t file taxes for your business?
Why Should You File Your Taxes? No matter individual or business, you must report all taxable income and pay taxes according to the Internal Revenue Code. This process is important not only to pay your tax debt, but also to get a tax refund and claim tax deductions. Thus, you can reduce your tax debt. Besides, regularly filing your taxes also prevents accumulating debts. This way, you can avoid penalties and interest.
Of course, the consequences are different for each company. However, some general implications are:
- Fines and interest
- Loss of deductions and credits
- General tax liens
- Substitute for Return (SFR)
- Revocation of corporate status
Negotiate the Tax Bill
You may face interest penalties and even jail time if you don’t pay your taxes for a long time, but above all, you always have a chance to negotiate. For this reason, talk to the IRS about an installment plan. You can also make partial payments to reduce interest. Try to explain with the Offer in Compromise that you couldn’t pay the debt due to life difficulties. However, working with a tax lawyer will make this process more stress-free and error-free.
How to file back taxes in 5 steps
Are you worrying and asking yourself, “How do I deal with the IRS for back taxes?” Don’t panic, just keep reading.
Gather necessary documents
Foremost, collect all relevant documentation for each tax year.
- W-2s or 1099s for income received.
- Bank statements, receipts, and invoices for deductible expenses.
- Records of tax credits or deductions for which you’re eligible.
- Any real estate, mortgage statements, and property tax documents.
- Statements of investment accounts, including capital gains and losses.
File your tax returns
Then file your tax returns for each year.
- If you’re filling it by hand, you can find printable prior-year tax return forms here.
- You can use tax preparation software to file back taxes.
- Get help with tax returns from a tax professional.
Never filed taxes before? It’s okay. All you need to determine which tax years you need to file. The IRS generally requires taxpayers to file their returns for the past six years. However, if everything seems complicated to you, consider getting helping from our free initial consultation.
What is a deficiency assessment?
After filing a tax return, the IRS examines it and sometimes may find discrepancies. The deficiency refers to the gap between the amount of tax taxpayers declare on their tax returns and the amount the IRS determines they actually owe. Besides, the IRS notifies taxpayers of this deficiency with a deficiency letter.
Complete and mail your return
Carefully fill out and complete your tax return(s). Include every source of income and claim every available deduction. If you filled out your tax return using online tax software, you’ll have to print the finished return out. Then mail it to the address included in the instructions for that year.
Consider professional help
Filing your tax returns can be a daunting task. A qualified tax professional can help you:
- Navigate through the tax return process.
- Track down tax deductions and credits you may have missed.
- Negotiate with the IRS to minimize penalties and interest.
- Establish a payment plan or settlement offer, if necessary.
Address any outstanding tax debts
The IRS offers various solutions for taxpayers:
- Paying the full amount owed, if possible.
- Paying the debt in monthly installments.
- Asking for a settlement offer to pay the debt for less than the full amount owed.
- Sentence reduction or other relief programs.
Conclusion
Every year you ignore it, the penalty gets higher. However, you can minimize your tax penalties with an accurate action plan. It’s understandable if you get lost in the tax laws because citizens can’t have full knowledge of the tax law as experts. Consulting with an expert is a stress-free and quick way to solve the problem if you’re dealing with high tax penalties.
Frequently Asked Questions
The IRS has a 10-year statute of limitations on federal tax debt, starting from the date of the tax assessment, not from when you filed your tax return.
The IRS can charge penalties and interest. They may file a Substitute for Return (SFR) and start collection actions like wage garnishment or bank levies.
Legally, you have up to three years to file taxes.
You should contact the IRS to make arrangements. The IRS offers payment options to help you.
There are four ways to inform your address changes. First, you can fill out Form 8822 or Form 8822-B. Second, you can use your new address when you file. Third, you can send a signed written statement. And the last, you can tell them in person or by telephone.
Call 800-829-1954 or 800-829-1040 to initiate a refund trace. However, if you have already filed a married filing jointly return, you should download and complete Form 3911.
Call 800-829-1040 to correct any agency errors.
Not paying your taxes may affect your life in many ways. When you apply to some institutions, they may also request a tax certificate from you among the necessary documents—for example, applying for a passport or health insurance.
The IRS gives 10 years to collect the relevant tax debts and all related penalties and interest. Then the taxes are considered the statute of limitations. That is, you’ll be free of tax debts.
If you purposely dodge paying your taxes, yes, it’s a major crime. In the end, it could lead to five years in jail and a fine up to $250,000 for individuals (or $500,000 for businesses).
According 2023 Tax Evasion Statistics, 63.3% of the people involved in tax fraud cases were sentenced to prison in FY2021.
Owing tax and filing are two different situations. So you may still have to submit a return. If your gross income is more than the automatic deductions for the year, you need to file your return. And you may be subject to the failure-to-file penalty.
