There’s no penalty for filing your taxes late if the IRS owes you money. But if you owe them money, things can get very ugly, very fast. Here’s what you need to know—and do—if you haven’t filed your taxes in years.
First, if you think you’re due a refund, your primary concern should be that you are leaving money on the table. A surprising number of people miss out on money they’re owed, as $1.5 billion in unclaimed refunds remain outstanding as of last July, according to the IRS. But the chance to claim your share of that money doesn’t last forever—you only have a three-year window. Since there’s no penalty for filing a late return, you’ll definitely want to do so if you are owed money.
But let’s say you haven’t file and you owe money. Or maybe you filed but haven’t paid what you owe. Either way, you could be in trouble with the IRS.
What happens if you don’t pay your taxes
Technically, not paying your past-due taxes is considered a misdemeanor and you could be sent to prison for up to a year, according to Cornell Law School’s Legal Information Institute. However, more commonly you’ll just have to pay penalties and interest on the taxes you owe—but that can add up quickly.
Going to jail is very unlikely, as David Cawley, a certified public accountant (CPA) and partner at Fraim, Cawley & Company, CPAS, explained to LendingTree:
“If you commit tax fraud by either lying on your tax returns or not filing your returns altogether, you may be subject to criminal charges, but taxpayers will never go to jail for not having enough money to pay their taxes.”
The government might be more lenient when it comes to jail time, but the penalties for not filing are significant. The IRS charges up to 5% per month on what you owe, up to a maximum of 25%. You also have to pay interest (check for the latest update on this IRS page for the current rate) along with a failure-to-pay penalty that’s 0.5% of your unpaid taxes for each month you don’t pay them, up to as much as 25%. The IRS has a full description of their late filing fees and penalties here.
Once you miss your payment, the IRS will send you a letter. They’ll send you at least two billing notices before the collections process begins, and that is when things can get pretty ugly. The IRS can freeze your bank accounts, garnish your wages, and even put a lien on your house. While the government has up to six years to criminally charge you with failing to file, there’s no time limit on how long the IRS can go after you for unpaid taxes.
How to fix it
There are some circumstances in which the IRS might waive your penalties, although you’ll still have to pay what you owe. You need to prove “reasonable cause,” as outlined on the IRS website:
Making a good faith payment as soon as you can may help to establish that your initial failure to pay timely was due to reasonable cause and not willful neglect. If you’re billed for penalty charges and you have reasonable cause for abatement of the penalty, send your explanation along with the bill to your service center, or call us at 800-829-1040 for assistance. The IRS doesn’t generally abate interest charges and they continue to accrue until all assessed tax, penalties, and interest are fully paid.
The IRS offers a few “typical situations” where you may be able to claim:
- Fire, casualty, natural disaster or other disturbances
- Inability to obtain records
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
- Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so
Note: while not officially listed on the IRS page, it looks as if the COVID-19 pandemic can be used as a reasonable cause as it ties into disaster relief, according to Accounting Today.
In any of these scenarios, you’ll likely need to provide documentation (such as court records or a letter from a physician). Once you’re ready to file and pay, you’ll want to file returns for every year you’ve missed. If you have old pay stubs, 1099s, or W-2s, obviously you’ll want to gather as much of that paperwork as you can. If you don’t have all of the information you need to file, you’ll have to provide your best guesses about your income, deductions, filing status, and so on. You might also be able to request a transcript from the IRS to get information from any W-2s or 1099s an employer filed on your behalf.
Once the returns for each year you’ve been delinquent are filed, pay off your back taxes and penalties. The IRS offers short-term (120 days or less) and long-term payment plans if you can’t pay it all at once. There are set fees for long-term payment plans, a summary of which can be found here.
If you can’t afford your back taxes and penalties, consider contacting the IRS to work out an installment plan. There’s also something called an “offer in compromise,” which is a request to consider accepting less than the full amount owed.
This post was originally published in 2017 and was updated on October 15, 2020 to provide more current information with regard to taxes and the pandemic.