Unfiled Tax Returns: What Happens If You Don’t File A Tax Return?

Filing an unfiled tax return or even multiple years of unfiled tax returns isn’t as big of a deal as you may believe. Even if you cannot pay the taxes that are owed with the return it isn’t that big of a deal. It is a big deal if you keep waiting longer and longer to file your tax return because the consequences may get worst. One thing to know is that the sooner you file your taxes the better off things are going to be. No matter how you look at it, the longer you wait the harsher the consequences may end up.

Consequences of Not Filing a Tax Return

Many people don’t file their taxes simply because they cannot pay their taxes. One important thing to know is that the penalties for not filing a tax return grow much faster than those penalties for not paying. Even if you are owed money on your return and you have not filed, the IRS can deny you a refund on those amounts if enough time passes. Below are some penalties the IRS will charge for unfiled and unpaid taxes.

  • Failure to File Penalty – This is the steepest penalty the IRS will charge for someone who owes taxes and did not file. This penalty is 5% of the total balance for each month that has passed since due. This penalty can be up to 25% of the total balance.
  • Interest “Penalty” – The interest on unpaid balances is 4% annual interest on unpaid balances. Interest is updated on a quarterly basis, so depending on when you are reading this it may be a bit more or a bit less than 4%.
  • Failure to Pay Penalty – This penalty is 0.5% of the total balance for each month that has passed since the balance was due.

As you can see from the above, it is very important to file unfiled returns even if you cannot pay since the failure to file penalty is the one that adds up the quickest. The IRS can also fine taxpayers up to $25,000 and 1 year in prison for each unfiled tax return. It is not common for the IRS to do this but they do have the laws in place more for a scare tactic and like to use celebrities as examples when they actually do enforce them. One good thing to know is that it is extremely unlikely for the IRS to prosecute anyone whom willfully files old tax returns.

How to File Unfiled Tax Return

When filing unfiled tax returns it is important to file sooner rather than later to reduce any penalties and interest you may receive.  Below are some steps to follow from gathering required tax documents to paying taxes owed.

  1. Required Documents – When you are filing old tax returns it is important to get the proper documents together that are required. In particular you must obtain old W-2s and old 1099 tax documents. If you can’t find the required documents you can ask your old company for the documents. If you cannot obtain the documents for you old company it is likely that the IRS may have them since it is required by law for your old company to report your earnings to the IRS. You can contact the IRS by calling 866-681-4271. If you still cannot obtain what you need then you can use a substitute W-2 to estimate what your W-2 would have been.
  2. Get Tax Forms Prepared – Whether you  are going to prepare yourself or have a company file for you it is important to get the returns for the specific years you missed. Even if the IRS has already prepared a tax return on your behalf it is very important that you re-file this because the IRS gives no deductions it is very likely that you will owe much less or get more back if you do this.
  3. File Your Returns – When sending in your returns you should send to the normal address that tax returns are sent to unless you received a notice from the IRS requesting you to file back taxes, then you send to the address on that notice.
  4. Pay what is owed – Before you can be back into full compliance with the IRS you must pay the taxes owed, enter into a payment plan or settle your taxes in some other way. If you are going to pay in full you can pay electronically, send a check, pay with a money order, send a cashier’s check, or pay cash. The IRS contains more information on electronic payments options on their website. If you want to pay in cash you must go to a local office and pay in person, cash must not be sent through the mail. If you cannot pay in full please read below for more options.

Many times when an individual has not paid taxes for one year or more, it is likely that they owe more taxes than they can afford to pay at once. For this reason the IRS has setup various options for taxpayers to pay back their taxes if they cannot afford to pay. Below are some of the most common methods used by taxpayers that cannot afford to pay in full.

  • Installment Agreement – An installment agreement is probably the most common form of payment plan used to pay back taxes. With an installment agreement taxpayers can pay back taxes owed in monthly installments for a period up to 60 months. This allows taxpayers to make smaller more manageable payments.
  • Offer in Compromise – An offer in compromise is a tax settlement program that allows taxpayers to settle their taxes owed for less. In order to file for this the taxpayer must be in full compliance with their tax filings and there must be doubt to the liability, or doubt to the collectability. What that means is there must be doubt as to the total amount of taxes being owed, or the IRS does not ever expect to be able to collect the amount of taxes owed from the taxpayer. This tax filing is very complex and is rarely accepted by the IRS. The IRS tries to only let the most deserving tax payers receive this kind of relief.
  • Get Declared Uncollectible – This is not an actual way to pay the IRS what is owed but it does buy time in order to come up with funds to pay. You can get declared uncollectible when you prove to the IRS that you can’t pay your taxes owed and you will not be able to pay in the near future. When this happens the IRS puts a hold on collecting taxes and they will check back every year or two for an update on your financial situation to determine if they can collect.

Once you have filed and paid your taxes you will be considered in good standing with the IRS. Just remember, it is never too late to file your taxes. In fact, the sooner you file the better. These days there is very little chance of getting away with not filing a tax return with the increase in IRS technology. The IRS is a slow but efficient machine, so it is best to try to stay in full compliance and resolve any problems as quickly as possible in order to reduce IRS penalties and interest.

13 thoughts on “Unfiled Tax Returns: What Happens If You Don’t File A Tax Return?”

  1. Very useful piece of information. When I read it, it sounded like IRS is more dangerous than credit card companies when it comes to penalizing for not paying or late payments.

    As they always say, Never mess with IRS!


  2. You’ve got that right, the IRS has much more power than any credit card company and their power goes far beyond their penalties. When the IRS places a lien on a taxpayers assets for not paying it makes it nearly impossible for that taxpayer to receive any type of loan or funding from anyone because if they were to default, IRS always has first dibs over any other company.

  3. Thanks for the helpful information. I am trying to straighten out my tax situation and file tax returns for 2005-2008. Is it best to send in a payment with each year’s return for what is owed snd wait to hear back from the IRS as to the amount I owe in penalties and interests or not send in anything and wait for a total bill for each year and set up payment arrangements? And also can I set up payment arrangements on mutliple years if necessary?

  4. @DeepTrouble: I wouldn’t handle this on my own if I were you. I’d get either a tax lawyer or Certified Public Accountant to help straighten out the mess.

  5. Or be like me and dont pay them a cent for 17 years and dont be so paranoid about it. It is also a good thing for your own character to stand up to evil and not promote it.

  6. I assume the consequences are far less if you didn’t actually have an income that year. Federal student loans aren’t taxed further are they? I think the second year I made under $1000 from a work-study job after withholdings.

  7. I got a letter from the IRS today, pointing out that I never filed a tax return for 1995. I was out of the country that year and received no income from US sources… hence, no W2 (which is what the IRS wants to see.) But my US employer went out of business in 1996. How do I get a W2 for 1995?

  8. I have not filed returns for 2008-2011.

    Is it possible to file my 2012 return by April 2013 and then focus on the past due/unfiled returns?

  9. Does the IRS hold lottery winnings, if the IRS is asking you for an unfiled return? First got a CP59 Notice in Dec 2014 asking for my 2013 return. Then 2 months later in Feb 2015 got a CP518 Notice. It’s now June 2015 and I’ve not gotten anything since. I just won a lottery. But am not sure if the winnings will be held when I go to claim it? Is it possible they have already filed a “substitute return”? And determined I don’t owe them anything? Thanks!

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