What are the penalties for not filing taxes?

Has April 15th come and gone and you have avoided filing your taxes? Maybe you don't have the information to complete your return, or you don't have enough money to pay your tax and are afraid to file your return. Whatever the case may be, not filing your taxes has very serious consequences.

by Stephanie Morrow
updated May 11, 2023 ·  6min read

Has April 15 come and gone and you have avoided filing your taxes? Maybe you don't have the information to complete your return, or you don't have enough money to pay your tax and are afraid to file your return. Whatever the case may be, not filing your taxes has very serious consequences. You many hear about people who get away with cheating Uncle Sam for years, but sooner or later the IRS catches up to people who have not filed.

We've all heard the countless tales of people avoiding income tax whether they are political protestors to straight tax dodgers. Well-known tax evader Irwin Schiff has even written numerous books on the subject. But, beware, what these books never tell you are that failing to file your tax return can be more costly.

Tax evaders often face large criminal penalties, including fines and imprisonment, as well as civil penalties. Take for example the case of the public accountant in Michigan sentences to five months in prison and five months of house arrest for failing to file tax returns for four, yes, four years. He also had to pay $140 thousand dollars worth of back taxes and $50 thousand in penalties and interest.

Filing taxes isn't voluntary, despite what tax evaders argue. If you make over a certain amount each year you are required to pay a tax on that income. In fact, this requirement is clearly set forth in section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates and trusts.

Not filing and not paying are not the same

This belief is a very serious mistake, because the IRS penalizes for both not filing and not paying. So, what can you do if you calculate your return only to realize you don't have the money to pay the tax? Many people in this situation believe they shouldn't file if they don't have the money. Again, it would be a big mistake not to pay. But, why?

Well, you end up paying a penalty on the amount you owe at 5% per month (4.5 % for not filing and 0.5% for not paying). The total penalty for failure to file and pay can eventually add up to 47.5% (22.5% late filing, 25% late payment) of the tax owed. Interest, compounded daily, is also charged on any unpaid tax from the due date of the return until the date of payment.

The point is that failing to file a tax return should never be an option.

What if you fail to file?

The IRS may file what is known as a substitute return for you. However, as you well know, the IRS will not be looking to save you any money. In fact, a substitute return will not include any of the standard deductions your accountant would typically include in your return. Case in point, a substitute return only allows one exemption: single or married filing separate, so you end up with higher tax liability than if you would have just filed.

The bottom line is, there are numerous reasons to file your tax return even if you cannot pay, including:

  • avoiding or minimizing the failure-to-file penalty;
  • avoiding having a substitute return filed by the IRS, and allowing you to take your adjustments, deductions and exemptions that are not calculated on a substitute return;
  • starting the statute of limitations (in most cases, three years) for a possible audit of your return. This basically means the IRS only has three years from the date you file to audit your return. However, that three-year time limit does not begin until you file.
  • starting the statute of limitations (ten years after assessment) for collection of the tax, interest, and penalties on your return. Again, this means the IRS cannot collect the tax, interest or penalties after ten years from the date you file. However, if you don't file, the ten year expiration clock won't start ticking.
  • starting the clock to make your taxes, interest, and penalties from your tax return eligible to be dismissed in Chapter 7 Bankruptcy (two-four years after filing). Just like the statute of limitations expirations, you're tax debt will be eligible for Bankruptcy sooner if you file immediately.

If the IRS finds that you owe them money, they will send you a bill called a Notice of Tax Due and Demand for Payment. This bill includes the taxes you owe, plus interest and penalties. Because interest and penalties continue to accrue, you are encouraged to pay your tax bill as soon as possible. The IRS accepts payment by credit card, electronic funds transfer, check, money order or cash.

What if i can't pay my bill in full?

Your best bet is to always pay as much as you can to reduce the amount of interest and penalties you'll owe. Then, immediately call, write or visit the nearest IRS office to explain your situation. Based on your situation, the IRS may offer one of the following resolutions to paying your bill:

Installment agreement

You may be able to make monthly payments through an installment agreement. This allows your full payment to be paid in smaller, more manageable amounts.

Temporary delay

The IRS may give you the option of temporarily delaying the collection of your bill if the IRS determines you cannot pay any of your tax debt. During this period, the IRS continues to review your ability to pay and the IRS may also file a Notice of Federal Tax Lien to protect the government's interest in your assets.

Offer in compromise

If you qualify for an Offer in Compromise, the IRS will settle your unpaid tax accounts for less than the full amount of the balance due. This applies to all taxes, interest, and penalties. Please note that a $150 application fee is charged when filing Form 656, Offer in Compromise. An Offer in Compromise is only considered after all other collection alternatives have been explored.

What if you receive a bill that you believe to be incorrect? You should immediately write or call the IRS office that sent you the bill, or visit your local IRS office. Make sure to have a copy of your bill handy, along with any records, tax returns, canceled checks, etc., that will help the IRS understand why you believe your bill is wrong.

One final note

Taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may face a variety of enforcement actions, including penalties and/or criminal prosecution. Not paying your taxes will warrant stiff penalties and interest, resulting in an ongoing, and very expensive, relationship with the IRS. For more information, visit the IRS Web site at www.irs.gov.

If you need legal advice regarding your tax situation, LegalZoom offers affordable attorney access through the personal legal plan. When you sign up for the LegalZoom legal plan, you will receive unlimited attorney consultations on new legal matters, up to 10 pages of document or contract review, tax advice from tax professionals, and more for a low monthly fee.

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Stephanie Morrow

About the Author

Stephanie Morrow

Stephanie Morrow has been a contributor to LegalZoom since 2005 and has written about nearly all aspects of law, from ta… Read more

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.