What Happens if You Don’t File Taxes?

It could happen to the best of us – before you know it the tax deadline crept up on you and you have had no time to submit your taxes. Or perhaps you skipped one year and you’re too afraid to file in case of penalties. 

This year, due to the pandemic-fueled economic recession, the tax deadline has been extended to July 15 (“Tax Day”). But what happens if you don’t file taxes by then? It’s not exactly the end of the world, but it’s important to understand the consequences of missing the tax deadline. 

From paying fines to accruing interest, we dive into the consequences of not filing and paying taxes on time and what you can do to sort out the situation. 

Do You Have to File Taxes?

If you’re earning an income as a U.S. citizen, then chances are you have to file your taxes. However, there are certain situations where you don’t have to file your taxes.

If your tax bill ends up being zero, or you are owed a refund, you are not legally required to file your taxes. However, if you don’t file within three years of being owed a refund, the IRS will keep that money. You also won’t receive any interest on that money. 

Therefore, if you didn’t file your tax return in 2016, this will be the last year to claim your tax refund if you are eligible for one. 

On the flip side, however, if you owe the IRS money, you are legally required to file your taxes and make the required payment. While the deadline this year is July 15, if you file for an extension the next deadline is October 15. 

What Happens When You Fail to File?

Failing to file on time or requesting an extension before Tax Day could bring about heavier penalties than not paying on time. 

What happens if you don’t file taxes depends on how much you owe the IRS and how long you wait to finally file your taxes or contact the agency. 

First, you’ll be slapped with a late filing fee. This starts at 5% of the taxes you owe and increases incrementally each month after the Tax Day deadline that you don’t file. It can go all the way up to 25% of your tax bill. For example, if you owed $1,000, your penalty could be $250. 

However, this penalty changes if you haven’t filed your taxes within 60 days after the deadline. The minimum penalty is then either $135 or 100% of your taxes, depending on which is less. This means your total tax bill could essentially double if you wait too long to file.

In very special circumstances, the IRS might consider waiving the penalty fees. For example, they would sometimes waive penalty fees in the case of a disaster victim, support personnel, and military service members in war zones. If you’re a U.S. citizen or resident foreigner living and working outside of the country or Puerto Rico, you will likely have a different deadline that allows more time to file.

You can also receive an Automated Substitute for Return (ASFR) if you haven’t filed a tax return for many years. This return is compiled by the IRS using financial information from your bank, employer, and other income generated in a tax year. The downside of this is that the IRS won’t take into account any deductibles and tax credits you might be eligible for. So if the IRS files an ASFR, you should probably not be expecting any favorable outcomes.

Experts advise you should reach out to the IRS as soon as possible if you ever receive an ASFR. Otherwise, they might start proceedings to collect the money you owe them. We’ll explain these collection methods in a bit more detail next. 

What Happens if You Fail to Pay Your Taxes?

Now that we’ve covered what happens if you don’t file taxes, what happens if you miss the deadline for paying your taxes?

While you can apply for an extension to file your taxes, you cannot ask for an extension on paying your tax bill. Even with a filing extension, you still have to pay your taxes by the deadline date or you will get slapped with fines. The size of the fine will depend on how big your tax bill is. 

Fortunately, the penalties for paying late are less severe than penalties for filing your taxes late. Instead of 5% of your tax bill for every month past the filing date, late payment only incurs a penalty fine of 0.5% of your tax bill for every month past the payment deadline, maxed out at 25%. This penalty will be waived if you also fail to file on time and instead will just pay the failing-to-file penalty. 

On top of the fine, you’ll also have to pay daily compound interest on the tax money you owe for the entire period you don’t pay. This interest starts to accrue on the first day after the deadline has passed at the Federal short-term rate plus 3%. 

Currently, the interest rate you’ll pay is set at 5%, but if it goes up during the period of non-payment, you’ll have to calculate the increase into your total bill. 

You can offset the compound interest by trying to pay as quickly as possible, or at least to try and pay some of it. The less tax money you owe, the less interest you’ll have to pay. The IRS is also always open to helping you set up a payment plan if you’re not able to pay your tax bill in full by the deadline. This is especially true in such hard economic times. Check the IRS website here to find out more. 

In the worst-case scenario, if you outright refuse to pay your taxes and avoid any communication with them, they have the power to garnish your paychecks or make a claim on (and sell) any property you own. They could even put you in jail for tax evasion. 

First Time Penalty Abatement

There could be some light at the end of the tunnel, though. If this is the first time you missed the Tax Day deadline, you might be able to get some relief with the First Time Penalty Abatement. The First Time Penalty Abatement will waive your late fees. 

To qualify for this perk, you have to meet the following criteria: 

• You weren’t legally required to file your taxes for the last three years (aka always had a zero tax bill or tax refund)
• You had diligently filed your taxes or extensions for all your previous tax years;
• You have paid all your tax bills or done so through an approved payment plan that’s current.

Unless you meet these eligibility requirements, you’ll have to pay the penalties and interest for late filing and/or late payment.

The 90% Rule

Another way to avoid late payment penalties is to make sure you pay 90% of your tax bill by the Tax Day deadline. If you pay 90% of your tax bill, the IRS won’t penalize you for not paying proper estimated taxes.

Last tax season you only had to pay 80% due to the tax law changes that came into effect in 2018. At that stage, there were some adjustments to how much tax was to be owed. This reduced percentage might still apply for this tax season.

Conclusion

Now you know what happens if you don’t file taxes on time. You might find the IRS intimidating, but the worst thing you can do when it comes to taxes is to do nothing and hope you can operate under the radar. The chances of such a plan succeeding are very low! 

Even if you can’t pay your tax bill, you still need to try to file on time or apply for an extension to avoid having to pay more penalties. If you’re owed a tax refund, there won’t be any penalties but you’ll still lose out on extra money if you don’t file.

Reach out to the IRS if you owe taxes – don’t wait for them to find you. If you don’t reach out, you might end up on the wrong side of the law.

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

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