What Happens If I Do Not File My Tax Return?

Inquiring about the outcome of not filing your individual taxes is an intriguing one, and depending on your point of view, no doubt would cause certain arguments to come to the fore regarding a belief that tax filing can be legally circumvented.

For the purpose of answering our question, I will only briefly touch on the urgings of these types of promoters who insist that the filing of returns is not required. Thereafter we will discuss the legal requirements to file and the possible repercussions if one does not.

The IRS has heard, and litigated on, all such frivolous arguments. Each year, additional non-filing schemes surface, with the consequences often being severe. As an example, consider actor Wesley Snipes. In 2008 Snipes was found guilty of misdemeanor counts of failing to file Federal income tax returns. Snipes fell into one of the many wily pitfalls designed to debunk the legal requirement to file.

By far, the most popular false contention regarding tax filing is that it is voluntary and not obligatory. Proponents may point out that the IRS itself tells taxpayers in the Form 1040 instructions that the tax system is voluntary. This simply refers to the system that allows taxpayers to determine their correct amount of tax owed based on their determined income, rather than have the government determine the tax for them from the outset. Multiple court cases have confirmed the same.

Therefore, if you're perhaps looking for an IRS filing loophole, you won't find it here. The requirement to file a tax return is lawfully established under Title 26 of the US Code. But what are the consequences should one fail to file? If income has been earned, is one automatically required to file?

The requirement to file a tax return varies per year, depending on the amount, and or the type, of income earned. Chapter one of IRS Publication 17 discusses the requirement to file. For tax year 2008, single filers must report their earnings if their gross income for the year was at least $8,950. A filing requirement kicks in for joint filers once combined income reaches the $17,900 mark. These amounts will vary per year. Other filing statuses carry different thresholds and the amounts further change if one is 65 or older. The requirement to file again changes if one lived or had income overseas, if they are a minor, or if they are self-employed. Additionally, the type of income is relevant. Earned income, such as from wages or a pension source, may carry different requirements than unearned income, such as investment income.

Check with the IRS if you are unsure if you have a legal requirement to file. Even if you do not, you may find that if you were to file, you would be entitled to a refund.

Even the best of us may fail to get our tax returns in to the IRS timely. If you are able to anticipate this, then you should file Form 4868, Application for Automatic Extension of Time to File. This form needs to be filed by the regular due date of the return, generally April 15^th. You do not have to explain why you need the extension; the IRS will contact you only if it is denied. This form will extend the filing date to the 15^th of October of that same calendar year.

Keep in mind however, that an extension to file is NOT an extension to pay. For this reason, the Form 4868 asks that you estimate your current tax year liability using information available to you, and then send in the appropriate payment. Failure to do so will result in additional penalties and interest charges, starting from the April 15^th due date and continuing through the date full payment is made.

One other point regarding extensions: If you have a refund, you do not need to request an extension to file. There are no late filing or payment penalties associated with a return that demonstrates a refund. Remember though, that you only have so long to claim your refund. The IRS is not a bank, and after three years goes by, your refund will be lost to the statute.

Penalties are incurred for a late filed return with a balance owing. A Failure to File penalty is assessed, at the rate of 5% of the net tax due, per month, for a maximum of five months, or until the penalty amount reaches 25% of the net tax due, whichever is earlier.

A Failure to Pay penalty is also assessed, that runs at ½ of 1% of the net tax due, and continues to be charged until the penalty rate equals 25% of the tax owing. There is no five-month ceiling on the Failure to Pay penalty. Different provisions may apply as well if both penalties are concurrently running. Additionally, after certain collection notices are served, the Failure to Pay penalty moves to a full percentage point.

Interest is charged as well on the tax, the penalty(s) and interest. Yes, interest is charged on interest, and it compounds daily. Overall, you will be charged around 20 to 25 percent considering all of the above. The IRS penalty and interest rates are designed to be high in order to encourage timely compliance. Most of the penalties can be avoided by timely filing, requesting an extension to file, making estimated tax payments, and most importantly, contacting the IRS immediately to resolve any un-filed or unpaid tax returns.

In addition to the penalty and interest charges, there are a number of other possible detriments resulting from an un-filed tax return. The IRS may begin to charge something called Backup Withholding. If an individual's primary income sources are from interest and dividends, or other 1099 sources, such as OIDs, Patronage, or general 1099-Miscellaneous income, then the IRS may send out notices that require payers to withhold a portion of the recipient's payment. The current backup withholding rate is 28%, and is in effect until the end of 2010. This withholding stays in effect until the delinquent returns are filed, and in many cases, well beyond.

Along those same lines, the IRS may hold any current year refund until past due returns are filed. This is done not only as a means to secure the delinquent returns, but to assure that any refund gets applied to a potential balance on that return, once it is filed.

The ability to negotiate resolution on a balance owed is also directly affected by the non-filing of returns. If you require an installment plan to pay back delinquent taxes on other years that have already been filed, the IRS will first instruct you to file any returns that should have been filed up to that point. If enforcement action has ensued, and perhaps a levy has been served to your employer or bank, you will be unable to get a release of levy until all returns are filed, and all balances have been resolved through the establishment of a payment plan.

Additionally, the filing of an Offer in Compromise, a popular method used by tax professional and CPAs to attempt to mitigate an amount owed, is not accepted as processable until a taxpayer files all returns that they are liable for.

If income reported to the IRS is high enough, and a return remains un-filed after multiple notices are sent out advising a taxpayer to file, then a taxpayer could be subject to the IRS Substitute for Return Program.

This program was developed to promote compliance with individuals who have not filed tax returns voluntarily and for whom income information is available to substantiate a significant income tax liability. Under these provisions, a return is assessed using the income information reported to the IRS. Bear in mind however that this is not a service to the taxpayer, it is a collection action. If the IRS assesses an amount under this program, it does so in a way that is least cost-effective to a taxpayer.

In other words, a resulting balance will be owed. The IRS will assess the return using a filing status of Single or Married Filing Separate, and will not allow any other credits, dependents, or expenses that would otherwise reduce taxable income. Certain transactions, such as the sale of property and stock securities, are treated as a straight gain and will not include any cost basis. Once the return is assessed, the IRS will then begin collecting on it. An original return can still be filed that demonstrates that a taxpayer does not owe the assessed amount, but by that time, often there has been an irreparable consequence.

Remember, it's not a crime to be in a position where you can't pay your taxes. The IRS has various options that are available to address this situation, and will be more than willing to work with a taxpayer who contacts them timely to make arrangements. However, it is a crime to not file, and as such, additional stiff penalties and or prison sentences can be handed out to willful or intentional non-filers.