Delinquent or Unfiled Tax Return Consequences for IRS or State Taxes

Unfiled or Delinquent Tax Return Consequences

In almost all cases, if you fail to file a Federal and State tax return, you can face further collection actions from taxing authorities if owe taxes. With regards to unfiled state taxes, TX, AL, SD,  WA,  WY, FL, and TN, do not have state income taxes. Anyway, even if you cannot pay all of the taxes you may owe at time of a filing, still file, and pay what you can. However, even if you do not owe the IRS taxes, there are negative consequences for not filing. Below are potential outcomes for failing to file.

  • Penalties - If you fail to file a Federal tax return by the due date (including extended due dates from a 6 month extension) you will face a failure-to-file penalty of 5% per month on the tax balance owed. The penalty cannot exceed 25% of the tax balance owed (which happens after 5 months). This 5% penalty per month can be reduced by the failure to pay penalty when both penalties occur in the same month. If your tax return is filed more than 60 days after the due date, the minimum penalty is $135 or 100% of the unpaid tax. One thing to realize is that if you do not owe the IRS taxes, and you have a delinquent tax return, no penalty will be assessed but there are other drawbacks.
  • No Refund - If you are due a refund from the IRS or State and you fail to file a tax return, you WILL NOT get your refund. If you fail to file a Federal tax return after 3 years, you can kiss that refund goodbye.
  • No Losses Can Be Carried - If you had an investment loss in 2009, you can offset your income up to $3,000 dollars but no more. Any losses over $3,000 can be carried forward. However, if you fail to file a tax return, the IRS or your State will not know about the loss, which means you will not be able to carry it forward.
  • Potential Loss of Tax Credits - Certain tax credits that are not claimed within a certain time frame, cannot be claimed at all. For example, if you want to qualify for the Earned Income Tax Credit, you need to file a tax return, and you must do so within three years of the deadline.
  • Substitute Return Consequence - If you do not file a tax return, the IRS will file one for you called a "Substitute Return" or SFR. The Internal Revenue Service is able to complete this task by utilizing documents such as W2s and 1099s. Typically, when the IRS does a SFR for you, they will only give you 1 exemption, no dependent(s) (if you have them), and only the standard deduction. Credits, and other deductions that were applicable may be missed which in turn may lead to you owing more than you thought, or consequently turning the tables from the IRS owing you a refund to you owing the IRS.
  • Statute of Limitations to Audit Never Begins - If your tax return is delinquent, and the IRS files an SFR for you, then it can be audited at anytime unless you sign the SFR paperwork that they will send you in the mail. This can become a problem because ultimately you could end up with a tax bill from the IRS auditing a return they did for you. Contrastingly, if you filed, the IRS has only 3 years to audit a tax return.
  • You Cannot Qualify for Bankruptcy - With either a chapter 7 or Chapter 13 bankruptcy, you cannot have unfiled tax returns. In fact, to qualify for Chapter 7 all tax returns need to have been filed at least 2 years before you filed for bankruptcy. With Chapter 13, typically you must have filed 4 years of tax returns before filing for bankruptcy.
  • Incarceration - It is very rare for you to go to jail for not filing a tax return, but it is a possibility. In fact under Federal law, you can put in jail up to a year and be issued a $25k fine for each year you do not file a tax return. Sometimes, the IRS may look at a non-filing as an attempt to evade taxes which will carry much stiffer fines and jail time. With regards to State taxes, each state is different but many states do issue fines.
  • Collection Efforts Could Be Begin - Once you fail to file a tax return and the IRS assess taxes owed you could be facing some collection mechanism such as a tax lien, or tax levy (such as wage garnishment, or a bank levy).

In summary, filing your taxes is in your best interests as the negative consequences are much greater than the simple benefit of saving time or not having to complete the task. Fortunately, tax preparers and software programs make it relatively easy to get the job the done with minimal expense.