What To Do When You Failed To File Your Tax Return

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By: Bill Henry
PublishedJul 18, 2018
8 minute read

The Mighty IRS and Your Tax-Debt Problems

Millions of American citizens, or roughly 5% of the US population do not pay their annual tax dues to Uncle Sam. According to Forbes, this failure has cost the federal government about $28 billion per year in lost proceeds. To rectify this problem, the IRS has been endowed with many tools to force taxpayers into financial submission.

There are many reasons why someone may not file their personal or business tax returns, such as for 1040 or 1120, or fail to pay taxes – from an extenuating life event to head-in-the-sand apathy – including those who willfully choose not to pay. Whether you have flirted with the idea or suffer from procrastination, be aware that the IRS takes tax collection very seriously.

To demonstrate just how serious the IRS is, one must look no further than the staggering amount of penalties the IRS can use against tax procrastinators and avoiders. There are roughly over 150 different civil penalties associated with taxes – whether that is filing late, not paying taxes owed or sending in an incorrect tax return. Penalties range in severity, from monetary fines to criminal penalties, and if not immediately dealt with, severity usually increases over time.

If you suffer from tax-incompetence or are perhaps just curious, then please read on. This article aims to discuss common tax pitfalls, the various tax associated penalties and how you can avoid and overcome them.

Failure-to-File vs Failure-to-Pay

There are a number of ways a taxpayer can get themselves in trouble with the IRS. The two most common are failure-to-file and failure-to-pay. Each has their own penalties and consequences.

Failure-to-file is when a taxpayer does not file their income tax return by the annual tax deadline of April 15th. Those who file late are then subject to financial penalties. The failure-to-file penalty is usually 5% of the unpaid tax amount but cannot exceed 25%. For those who file 60 days late, will face either the minimum penalty of $135 or 100% of the unpaid tax, whichever is smaller. What if I don’t owe any taxes, you may ask? Filing your tax return is required, whether you owe taxes or not. If you earn an income, then you must report it to the federal government. If you do not, then you will still be liable to pay the $135 dollar fine, should you file any later than 60 days.

Failure-to-pay is when a taxpayer owes money to the IRS and does not make their payment on time. This penalty is less than the failure-to-file penalty, incurring a .5% charge per month based on the amount you owe. Similarly, the charges cannot exceed 25% of the debt owed.

A taxpayer can be found guilty of both penalty types if they file late and have taxes owed. Usually, the IRS has a kinder outlook on those who file but perhaps cannot immediately pay their tax debt. Since the failure-to-file penalty amounts to 10 times the failure-to-pay penalty, it is recommended that you file regardless of your ability to pay – as this will save you money now and give you a better standing with the IRS later.

What is a frivolous return?

For those who intentionally try to “delay or impede” the IRS, by say leaving off pertinent information, such as their social security number, the IRS can instate a $5,000 fine. This is to deter tax dissenters who are attempting to waste IRS time and resources by sending in an incomplete return. Additionally, those who cite frivolous arguments to avoid paying taxes are also liable under this penalty. Arguments such as paying your taxes is voluntary or refusing to pay on religious or moral grounds, are considered frivolous and subject to penalty.

Penalties for Failing to Pay Unpaid Taxes

Depending on how much you owe and how late you are, the penalties can be relatively mild to very extreme and will snowball over time. To begin the collection process, the IRS will attempt to notify a delinquent account owner by mail. Ignoring these notices will result in the IRS resorting to harsher collection tactics. If a taxpayer doesn’t voluntarily pay, the IRS will take what is owed through garnishments, liens and levies. Below are a number of issues a taxpayer may face should they find themselves indebted to Uncle Sam.


As discussed earlier, the IRS may impose monetary fines on those who fail to file tax returns, or fail to pay unpaid tax. Additionally, taxpayers may also face interest on unpaid taxes.

Turn Over Your Account to Private Debt Collector

In spring 2017, the IRS will start a more aggressive campaign by using private debt collection companies to chase up any accounts that have outstanding balances. The IRS estimates that it will turn over 1000 accounts a month, beginning in April 2017. This means that those who owe Uncle Sam may start hearing from not only the IRS but also its debt collectors. This may prove troublesome due to the rise in fraudulent callers attempting to impersonate debt collection agents. Read more on this issue here.

Forfeiture of Tax Refunds

A taxpayer can only collect their tax refund for so long. The IRS only gives a taxpayer 3 years to claim their refund, so for someone who has not filed for several years, they face losing their refund, in addition to racking up monetary penalties.

Loss of Social Security Benefits

For self-employed persons who do not report their income, risk losing future social security benefits, as they won’t receive income credits toward retirement. Additionally, for those that fall behind in tax debt, the IRS can levy up to 15% of your social security check – regardless of the financial burden that may impose on the taxpayer.

IRS Substitute Return

For those who do not file, the IRS may prepare a substitute return for you. This will usually result in a higher tax amount owed, as the IRS cannot add in any tax deductions or exemptions which you may be entitled to.

Poor Credit Score

If the IRS instates a tax lien on your property, it will automatically be reflected on your credit score. This is then visible to any agencies that can pull up your credit report and can hamper your ability to obtain personal loans, rent a property or buy a car. This unsightly blemish can last up to 10 years unless the lien is removed and withdrawn.

Passport Revocation

The FAST Act, which also allows the IRS to hire private debt collectors, also allows the IRS to revoke passports from delinquent payers. While passports usually fall under the authority of the State Department, the FAST Act allows the IRS to contact the Department and notify them of seriously delinquent accounts (accounts who owe $50,000 or more). The Department can then refuse to issue or renew a passport, even revoke a current passport. The IRS is required to notify the taxpayer before they contact the State Department. Accounts that are under an installment agreement or an Offer In Compromise are excluded from this practice.

Wage garnishment

The IRS may contact an employer and demand that money be withheld from a taxpayer’s wages to pay for their tax debt. According to tax code, the IRS will take as much as it can, leaving only what it deems necessary for basic living needs. In deciding how much it can take, the IRS bases the amount off how many tax exemptions a taxpayer claims.

Property Liens and Seizure

The IRS may seek payment through placing a lien on a taxpayer’s home. A lien secures payment of taxes by giving the IRS property rights. This doesn’t mean that the IRS will force you to sell your home, but it means that when you sell it, a portion of the sale profit will go to the IRS to satisfy outstanding taxes. A taxpayer has 30 days after the lien is instated to request an appeal. According to the Collections Statute of Limitations, a lien expires usually in 10 yrs.

Instead, the IRS may instead seek to instate a levy against any real or personal property. This means that the IRS can seize and then sell your home, car or other assets. A lien is not a prerequisite to getting a levy draw up against a taxpayer. The IRS can use either or both, depending on the circumstance. Liens and seizures only occur on larger tax bills, which must be in excess of $5,000.

Jail Time and $25,000 Fine

For those found to be willfully noncompliant in avoiding their tax paying duties, the IRS can seek criminal penalties including hefty fines and jail time. In 2013, of those prosecuted, 85% resulted in the sentencing of jail time, averaging 48 months of service. However, the IRS would rather work with someone and pursue litigation only in rare cases such as if you owe a large amount of money or if your income is from an illegal source. Basically, you won’t go to jail if you simply can’t pay your taxes but you can if you attempt to cheat the system.

What if I had a good reason?

The IRS states that if someone can show that they were not willfully negligent in their failure to pay or file their taxes on time, then they will not be subject to any financial penalties. Reasonable causes such as health problems, family emergency or natural disaster are commonly cited. Lack of funds is not an acceptable reason. You will need to submit the proper documentation to support your claims, such as hospital records or court documents. To notify the IRS of an event of incapacitation, you will file form 843 and send it along with your supporting documentation to the IRS.

What are my options?

Tax extension

If you think you may need extra time to file your tax return then you can submit form 4868. This will only extend the time you need to file by (6 months) but you will still need to pay on time. If you can also pay 90% of the taxes owed by the extension due date, then you will not be charged the failure-to-pay penalty.

Installment Plans

While the IRS would rather a tax payer pay a fine in full, for those facing large sums, or unable to fully pay at once, can ask for an installment plan. This results in paying off tax debt in monthly installments, not to exceed 3 years. Beware, this option will cause you to pay more than the initial fine due to the application of interest on the debt owed.

Filing for Bankruptcy

This option is tricky and dependent upon a host of factors. Filing for bankruptcy under chapter 7 or 13 is the most common method. One can only file for unpaid taxes that are 3 years or older. A taxpayer must have filed 2 years of tax returns before you can file for bankruptcy. Only income taxes can be discharged (forgiven), payroll taxes and fraud penalties can generally never be discharged. Additionally, if fraud or tax evasion has been committed, then bankruptcy will not forgive those tax debts.

Offer In Compromise

For those unable to pay, or payment of tax debt that results in financial hardship, these persons may want to consider this option. It is basically a settlement with the IRS on paying less than you owe. The IRS will consent if it believes it’s the greatest amount it can get in a reasonable period of time. When considering these applications, the IRS will look at a persons’ ability to pay, income, expenses and assets. This option is not available to those in the middle of bankruptcy proceedings. To be considered, Form 433- A (for individuals) or 433-b (for businesses), along with a $186 application fee and an initial payment will need to be submitted.

Innocent Spouse Relief

For those who owe taxes due to actions of their current of former spouse (like reporting the incorrect income) or taxes which have arisen from a divorce, separation or annulment may be eligible to apply for Innocent Spouse Relief. Must submit IRS form 8857 within 2 years of being contacted by the IRS, notifying you of any unpaid taxes. Widowers are also eligible for this relief.

Legal Help

An attorney can help you negotiate a settlement with the IRS. Additionally, an attorney can act as your representative, so you won’t have to deal directly with the IRS. An attorney can look at your unique circumstance and get you the best possible outcome – whether that is contesting a lien through an Offer in Compromise or paying less than the full amount by arguing a case for hardship.

What have we learned?

Only in rare cases like proving financial hardship or extenuating circumstances which render a taxpayer unable to pay their tax debts, does the IRS forgive a taxpayer’s financial obligation. To avoid common pitfalls, it is always recommended that a taxpayer file their yearly income tax return, abide by tax deadlines and pay what they owe. If you cannot pay, then you should still file and work with the IRS on your payment options.

For those who already have incurred tax debt or are unsure of their status due to repeated failure to file their tax returns, speaking to a tax attorney is your best option. Many attorneys can advise you on available options that fit your unique circumstance, draft legal correspondence and help you acquire all the supporting documentation you will need. At Robinson & Henry, our tax attorneys will provide a initial assessment for those seeking tax-debt relief (please click here to schedule a consult).

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