The Problem with Past Due Tax Returns

Tax Day rolls around each year. If you have delayed or simply passed on filing your tax return, you may be surprised at the difficulties it can cause.

Everyone of working age is aware of the necessity of taxes. Workers pay employment taxes, employers hand over those payroll taxes, and individuals and companies file tax returns with documents that support the amount of tax or refund due. Most people who are due a tax refund file promptly, even early. But even those due a refund lose the money if the refund is not claimed within three years of the tax return due date.

So, what happens if you have unfiled past-due tax returns? Actually, quite a lot and none of it is good.

Millions of taxpayers fail to file their tax returns each year. At the outset, you may receive a letter from the IRS notifying you that you are being assessed a penalty for failure to file. The penalty is roughly five percent of the unpaid tax owed. Eventually that five percent ages into 25 percent if the return is not filed. The IRS notes, at 60 days late, the minimum penalty is approximately $435 or 100 percent of the tax reflected on the return, whichever is less.

Interest is due on penalties owed. As well, if a refund is due to a taxpayer with an unfiled tax return, the agency can hold the refund until the return is filed.

Failure to file a tax return also has collateral consequences, which can include:

• Self-employed workers who do not file a federal tax return do not get credit for time in the workforce or income contributed to Social Security programs. In order to receive Social Security benefits at retirement, workers who do not have sufficient credits cannot draw Social Security or federal disability payments.
• To finance a major purchase, such as a home, business, or educational loan, financial institutions and creditors require copies of duly filed tax returns. It can be awkward to explain to someone from whom you would like to borrow a significant sum of money that you choose not to file tax returns.
• The IRS receives copies of W-2 forms received by each taxpayer. These forms help the IRS assess the accuracy of a return or determine if a taxpayer has filed a false income tax return. From the W-2 received on your behalf, the IRS will prepare a substitute tax return for you. Although the form is prepared without exemptions or deductions you would normally provide, the IRS can legally assess the amount of tax due based on their substitute return. While the IRS will usually correct the return if you can provide an accurate tax return, the entanglement could leave you flagged for future audit for the trouble.

And it gets worse—if you ignore the tax due on the substitute return? The IRS can launch collection proceedings to garnish the money and due penalties with interest from your bank account or paycheck. The IRS can also file a federal tax lien, launch an audit, or a criminal tax investigation that leads to prosecution.

Failure to file is a fast and purposeful way to catch the attention of the IRS. We don’t recommend it.