Didn't Pay Your Taxes? A Guide to Penalties, Liens, and Your Legal Options

Each taxpayer’s situation is different, and some people don’t file tax returns for various reasons. The problem for these non-filers is that the Internal Revenue Service expects every taxpayer who earns above a minimum amount to file a federal income tax return by April 15 each year.

It may take a while for the IRS to notice that you didn’t file your return by Tax Day, but the government is getting better at tracking down non-filers. Once it realizes that it’s missing your tax return, you must be prepared to resolve the issue or face costly fees and penalties. In some cases, you may even face criminal charges.

This article explains what to do if you didn’t file your taxes on time or failed to pay your tax bill by the due date. It also shows what to do if the government decides to file criminal charges against you for tax evasion or tax fraud.

Tax issues can quickly spiral downward. If you’re dealing with a tax issue and aren’t sure what to do, consider speaking with a local tax attorney.

Owing the IRS Money Is Cause for Concern

If you owe money to the IRS, you should definitely be wary. The same is true if you don’t file your taxes on time. It’s one thing to be a few days or weeks late in filing your taxes, but quite another to have failed to file taxes for two or three years.

If you don’t file your taxes, you’ll face serious consequences. Not only will you have to pay interest and penalties on any back taxes you owe, but you may also have to pay failure-to-file penalties. These fees and penalties accrue interest at a rate that’s probably higher than you may think. By the time all is said and done, you will end up paying a lot more than you originally owed.

Depending on the facts of your case, the government may file criminal charges against you. This can lead to up to a year in jail for each return you did not file on time.

The good news is that there are options for resolving both past due taxes and unfiled tax returns, which we’ll do our best to explain. To ensure that you take advantage of all the available options, reach out to an experienced tax attorney.

Determine the Best Path for Your Situation

When you meet with your tax attorney, they’ll need to know all the details of your tax issue. Do you owe money for back taxes, or has it been years since you filed a tax return? Your current predicament will determine how best to proceed. It will also help your lawyer identify the solutions available to you. Let’s take a look at two possibilities:

• You Didn’t File Your Tax Returns on Time: One of the reasons it’s dangerous not to file your taxes is that there is no statute of limitations on tax assessments and failure to file penalties. The government can continue to assess these penalties, along with interest, until you file your past due tax returns and pay any taxes you owe. You should also be aware that the government can file a substitute return on your behalf. When the IRS takes this route, you don’t have the benefit of tax deductions and tax credits, which will undoubtedly result in a much higher tax bill. Once the IRS files this substitute return, it will start charging an interest rate on any tax debt, making it even more difficult to resolve the debt later.

• You Filed Your Taxes but Didn’t Pay Your Tax Debt: Owing back taxes is not as bad as not filing taxes, but it’s still not ideal. The government will assess penalties and interest on your tax debt and also initiate collection activity within a few months of your filing date.

Regardless of which predicament you find yourself in, the same solutions apply. You’ll need to file tax returns for any years you missed and pay any outstanding tax debt. Your tax attorney will help you negotiate with the IRS to keep the penalties to a minimum. They will also work hard to prevent the government from filing criminal charges.

Understanding the Consequences: Penalties, Liens, and Levies

At this point, you are aware of the dangers of not filing your taxes and failing to pay your tax debt. Understanding the consequences is the next step. Without fully comprehending what’s at stake, it’s difficult to decide how to forge ahead. Let’s examine some of the negative consequences of not filing and paying your taxes by the due date.

Failure-To-File Penalties

If you don’t file your tax returns by the due date, you will be subject to a failure-to-file penalty. This penalty is equal to 5% of your tax bill for each month your return is late. The total penalty cannot exceed 25% of your tax debt. For returns more than 100 days past due, the minimum penalty is 100% of the unpaid tax or $485, whichever is less.

Substitute Returns

The IRS may discover that someone has not paid their taxes because the individual’s employer files a Form W-2 or Form 1099. This lets the IRS know that you received income in a given tax year. When this happens, you’ll receive an IRS notice asking you to file returns for the missing years.

If a taxpayer still doesn’t file their taxes after the government repeatedly asks them to do so, the IRS will file a substitute return on their behalf. The agency will generate the return based on the limited information it has. Taxpayers who fail to respond to the notice about a substitute return may be subject to immediate collection action.

Failure-To-Pay Penalty

Just as a person who doesn’t file their taxes will face failure-to-file penalties, a taxpayer who fails to pay their amount due will face a failure-to-pay penalty. The “good news” is that this penalty is much lower than the failure-to-file penalty.

Any tax payments you make after the due date will be subject to a late-payment penalty and interest. This penalty is 0.5% per month and can reach up to 25% of your unpaid tax bill.

Surrender of Future Tax Refunds

If you fail to file your taxes or owe back taxes, the government will likely seize any future tax refunds you are entitled to. Let’s use an example to illustrate what this means.

Imagine that you didn’t file taxes for three years. In the fourth year, you file a tax return and are due a refund of $2,400. The IRS will likely see that you failed to file your taxes during that three-year period and generate substitute returns, which assess a tax debt of $4,400. Instead of sending you the $2,400 refund, the government seizes it and applies it to your debt.

To make things worse, you also owe $1,300 in penalties and interest. In addition to losing your refund, you still owe $3,300.

Federal Tax Liens and Levies

If you owe past-due taxes, the government will do whatever it takes to recover its money. This includes collection action, bank levies, property liens, and wage garnishments. They will persist with these efforts until your debt is paid in full.

Of all creditors, the IRS has one of the most aggressive collection processes. They won’t waste time pursuing estimated tax payments. Instead, they’ll demand that you pay the full tax amount owed or suffer the consequences.

Once the IRS places a levy on your bank account, it will be difficult to manage your bills. Your best option may be to contact a local tax lawyer to try to work out a monthly payment plan, an installment agreement, or a settlement in exchange for the IRS releasing the levy or lien.

How To Resolve Your Tax Debt

The IRS is one of the most powerful of all government agencies. As long as the agency can prove that you owe them money, there is almost no limit to what it can do.

The path you choose depends on your specific situation and the available options. For instance, if you owe a large amount of money, you may request a long-term payment plan or try to negotiate an “Offer in Compromise,” which is a settlement for less than the full amount of your tax liability.

If you cannot afford either a short-term payment plan or any installment agreement, you may qualify for something called “Currently Not Collectible” status (CNC). This means you are experiencing extreme financial hardship and cannot afford to pay your back taxes.

It’s not easy to prove eligibility for this status. If your attorney can demonstrate your hardship and prove that it will not change in the foreseeable future, you may successfully achieve CNC status. For instance, if you can show that you are living in low-income housing, it will go a long way to proving that you are not worth pursuing for the tax due.

The bottom line is that the government would much rather reach a payment agreement than go unpaid. A tax attorney can explain your payment options and help determine what the best solution is for your situation.

When Does Failure To Pay Become a Crime?

Failure to pay taxes or file a return is not, in itself, a crime. In most cases, the IRS just wants you to pay what you owe and will work with you without filing criminal charges. The IRS rarely prosecutes cases where taxpayers make a mistake without intent.

If you took steps to conceal sources of income or lied on your tax return, the outlook is much less positive. The IRS is more likely to charge you with tax evasion or tax fraud, which are serious crimes with severe penalties. The Department of Justice (DOJ) prosecutes criminal tax cases referred by the IRS.

What Happens When the IRS Suspects a Tax Crime?

In most instances, the IRS doesn’t file criminal charges until after conducting an audit. They will investigate your income and financial situation. If they find that you willfully withheld information from the government, there is a chance they will charge you with tax fraud or tax evasion.

The IRS conducts random audits, but it will also initiate an audit after learning that a taxpayer has not been honest on their returns. This could be from receiving a copy of a W-2 from an employer showing that you earned more than you disclosed on your return, or your ex-spouse tipping them off that you lied about your income or charitable donations.

What Is Tax Evasion?

Tax evasion involves lying on a tax return to avoid paying taxes, failing to file a return, or failing to pay the tax owed. To qualify as tax evasion, the government must demonstrate that you acted willfully. For simply being negligent or making an honest mistake, the IRS will likely not pursue criminal charges. You’ll still be responsible for any money owed.

Tax evasion often applies to taxpayers who are involved in criminal activities. However, the federal government can charge anyone who intentionally fails to pay or underpays their taxes.

What Is Tax Fraud?

Unlike tax evasion, tax fraud can be criminal or civil. If you commit civil tax fraud, you may end up paying a stiff penalty, but you won’t go to jail. However, a conviction for criminal tax fraud can result in jail time and fines.

Still Have Questions? A Tax Attorney Can Help

If you have an unpaid tax bill and want to understand your options, a local tax lawyer can help. A tax attorney understands tax law and the legal protections offered to people with tax problems. A tax lawyer can also negotiate with the IRS to minimize the amount you owe, reduce penalties, and prevent further collection action.