1) Go to Jail
Not filing federal tax returns is often the result of tax fraud. Each unfiled tax return can result in a one-year jail sentence and a $25,000 fine. The IRS could send a taxpayer to jail for up to 5 years for a single tax felony offense. Penalties like these are rare and are the result of serious felonies. The IRS has gotten aggressive in recent years in their pursuit of tax cheats.
2) Incur a 25% Penalty
One of the harshest yet common IRS penalties is the failure-to-file penalty. The failure-to-file penalty begins the day after April 16th or October 15th if the taxpayer has filed an extension. The penalty is 5% a month for a maximum of 5 months. The ceiling is 25% of the tax debt.
3) Incur Added Penalties
The IRS has an arsenal of 140 penalties to use against taxpayers. For example, it also assesses a failure-to pay-penalty of .5% a month and combines it with the failure-to file-penalty to reach a 25% ceiling. And the IRS charges interest on the combined amount of back taxes owed and penalties.
4) Increase Taxes Due
The IRS may file a “Substitute for Return” if a taxpayer does not file a timely tax return. These IRS filed tax returns always favor the government and never favor the taxpayer. The taxpayer receives one standard deduction and one personal exemption. The “Substitute for Return” does not include added standard deductions, personal exemptions, other deductions and tax credits that may be due a taxpayer. This often subjects the taxpayer to a larger tax liability and greater interest on the tax due plus penalties assessed.
5) Delay Tax Relief
The IRS will not resolve a tax problem until that taxpayer files all delinquent tax returns. Filing unfiled tax returns quickly reduces the penalties and interest the taxpayer will owe.
6) Lose Tax Refund Forever
It’s never too late to file a tax return. But to claim a refund, the taxpayer has only 3 years from the original due date of the tax return to file. Once past this 3 year deadline, the taxpayer can only use the refund toward back taxes owed. The taxpayer cannot receive the refund.
7) The 10 Year IRS Collection Statute
The IRS has 10 years from the date it finalizes the tax liability to collect the taxes owed. This is usually the tax return filing date. On this date the 10 year collection clock begins ticking. Delayed tax return filings only delay the start date of the 10 year period. The IRS calls the last day of this 10 year period the “Collection Statute Expiration Date”.