A majority of taxpayers are required to file a tax return every year. Unfiled taxes occur when taxpayers fail to catch up on delinquent tax debt or ignore the overdue balance altogether.
Filing your taxes can be confusing in general, and if you fall behind on paying them, things will really start to get complicated.
What Is the Penalty for Unfiled Taxes?
Many taxpayers believe that not filing tax returns can lead to short-term financial relief, but more often than not, it contributes to severe financial distress and serious legal consequences.
The IRS does not take unfiled tax returns lightly. The organization keeps extensive records of taxpayers who do not fulfill their federal tax obligations and will eventually invoke a strict collections process until the outstanding balance is met. For example, the IRS may charge you expensive late penalties and interest, withhold your refund, or even file a return on your behalf without accounting for beneficial credits or deductions.
The most immediate repercussion for unfiled taxes is the failure-to-file penalty or the late-filing penalty, depending on the situation. The failure-to-file penalty is given to taxpayers who do not file a tax return. It charges 5% of the unpaid tax for each month your return is late. This charge is re-evaluated every month and is subject to increases. The maximum failure-to-file penalty is 25% of the total debt amount.
The late-filing penalty is slightly different. It affects those who do not pay their taxes, but provide important tax documents on time. The IRS will charge you 0.5% — with a maximum of 25% — of your unpaid taxes for each month they are unpaid. Other interest-based costs may be added on, as well.
If there is evidence of tax evasion or fraudulent activity, the IRS will deploy a series of extreme collection efforts, including tax levies, tax liens, wage garnishment, etc.
How Can I Resolve Unfiled Taxes?
You have a few options when attempting to handle your outstanding debt, alleviate penalties, and properly resolve your tax obligations.
- Set Up a Payment Plan
If you can’t pay your taxes within 120 days, the IRS suggests setting up a long-term payment plan to help manage the balance. Unfortunately, these payment plans are only available if you owe less than $500,000 and typically include corresponding penalties and interest added to the overall debt.
- Offer in Compromise
You could also propose an Offer in Compromise, which is a negotiated payment for less than originally owed. In order to qualify, you will have to prove that paying off the original balance would result in extreme financial hardship.
- Tap a Tax Professional For Help
Many taxpayers attempt to resolve unfiled taxes on their own, but navigating the ins and outs of tax debt can be very tricky. You may get entangled in unnecessary wage garnishments or tax levies. A qualified tax expert can implement smart strategies to ensure the best possible outcome when reconciling tax debt.