In the struggle to maintain a balance between professional and personal responsibilities, some things on our to-do list often get overlooked. Sometimes the consequences of forgetfulness are negligible, but in other instances they involve penalties. Therefore, you must prioritize tasks, but in case you do miss out on something, you should at least be aware of the outcome. In this article, we will be discussing what happens if you don’t file taxes.
In the United States, Tax Day is the 15th of April every year. If you do not file your taxes by this date but the amount you owe is zero dollars, no penalty will be imposed on you. However, if you are entitled to a refund but forget to file it for 3 consecutive years, you won’t be eligible to receive the amount any longer.
Failure-to-file vs. failure-to-pay
If you do owe taxes, yet file them late, you will be liable to pay a fine as punishment. It is one thing to forget the filing but another thing not to pay taxes at all. Although the latter seems to be a more serious and deliberate offense than the former, surprisingly, failure-to-file involves higher penalties than failure-to-pay.
Deadline to file taxes
The latest you can file your taxes is by midnight on Tax Day. If you think you will not be able to meet the deadline, you may request an extension in advance. However, getting an extension for filing does not mean that you simultaneously get permission to delay the payment.
What happens if you don’t file taxes?
The penalty for not filing taxes on time is 5% of the amount owed every month. However, it cannot be more than 25% of the taxes due.
In case, a tax return is not filed even after 60 days of the due date, the penalty imposed will be at least $210 or an amount equivalent to the outstanding tax payment (whichever is less).
A waiver may be given by the Internal Revenue Service (IRS) under exceptional circumstances. For example, if you are a victim of any disaster, serve the armed forces, or are a US citizen living abroad, you will be allowed more time to file taxes.
Individuals who usually file and pay taxes on time may also get a waiver or relief when paying a penalty.
What happens if you don’t pay taxes?
If you do not pay taxes by the due date, you will be liable to pay the IRS 0.5% of the unpaid amount as a penalty. However, the maximum fine that can be charged on unpaid taxes is 25% of the total bill due. Additionally, interest is also applicable on unpaid taxes. It starts getting accrued from a day after the due date and keeps compounding daily until the full payment is made. The interest rate is 3% plus the Federal short-term rate. One thing to be kept in mind in this regard is that the Federal Short-term rate is subject to change as it is set every three months.
If a person is liable to pay both penalties, failure-to-file vs. failure-to-pay, then the total fine charged per month cannot be more than 5%.
If you want to pay a minimum amount as penalty and interest, the best approach would be paying the maximum amount possible on time. That way, you will end up owing less and consequently be charged a lower penalty and interest rate.
First-time penalty relief
Knowing if you are eligible to get a waiver or subsidy on your first penalty would protect you against exorbitantly high payment. Those meeting the following criteria are eligible for relief:
- If filing taxes was not a requirement for the individual till 3 consecutive years before the penalty was charged
- If taxes have been filed or extension has been applied for on time for all the preceding years
- If taxes have been paid off or a payment plan has been agreed upon after negotiating with the IRS
The 90% Rule
If you have been paying at least 90% of the taxes by the due date for most of the previous years, the IRS might not charge a penalty if you fail to pay the estimated taxes for one particular year. However, withholding tax that is automatically deducted by employers is not counted in this 90%.
Nonetheless, if taxes worth 80% have been paid for a current year (including the withholding tax and quarterly estimated tax payments), then the penalty will not be charged by the IRS.
What to do if you can’t afford to make timely payments?
The least you can do is to file your taxes on time if you can’t afford to pay them by the due date. If you file taxes, you can also apply for an extension which will give you a leverage of 6 months so you will have until the mid of October to pay taxes without being charged a penalty.
Even if you simply file taxes on time and do not get an extension, you will only be charged a “failure-to-pay” penalty instead of a combination of “failure-to-pay” and “failure-to-file”.
Long-term consequences of ignoring taxes
Although the maximum penalty for not making tax payments on time is initially limited to 25%, the fine can turn out to be more than your outstanding taxes if you fail to make the payment till 60 days because the penalty keeps on compounding until you don’t pay off the dues. However, if you continue defaulting for long, the IRS will use alternate options to recover the amount. These may include extreme measures such as:
- Garnishing your salary
- Forfeiting your refund
- Placing a lien against your property
Given the consequences, the best thing to do would be to pay the outstanding taxes and penalties as soon as possible and then start planning for the next year so that you have a sufficient amount saved to make the payment by next Tax Day.
It might be helpful to keep a check on your withholdings and to ensure that you are paying the correct amount as estimated tax. Also, do mark the due dates for filing and payment on your calendar so that you do not miss them accidentally.