by Justin Moyer, North Carolina Tax Controversy Attorney
Have you ever wondered what happens if you do not file your income taxes? Let’s take a look at the consequences of failing to file and/or pay taxes.
In 1954, President Eisenhower asked Congress to make several reforms to the tax code including establishing the due date as April 15, now officially known as Tax Day. (*Note: Due to Covid19 issues, the IRS and NCDOR extended the filing deadline for 2020 to July 15, 2020).
The IRS and state tax authorities receive a lot of information on businesses and individuals including W-2 forms from employers indicating wage amounts, 1099 forms from banking institutions reporting interest earnings and statements from real estate closings reporting gains earned from the sale of real property. All of this information is collected and matched using Social Security and Employer Identification Numbers (EIN).
It may take the IRS some time to match up your income with your tax return, but eventually the match happens, and if you fail to file a return, they discover this as well.
So if you are wondering what happens when you do not file and/or pay taxes, let’s start by making the distinction between failure to file and failure to pay.
Failure to File
If you fail to file your tax return by Tax Day, the IRS will penalize you with a late fee. The late fee is calculated as 5% of the amount of taxes you owe for each month past Tax Day. The penalty maxes out at 25% of the amount of taxes you owe.
Failure to Pay
Penalties assessed for failing to pay are actually lower than those assessed for failing to file. You will pay a penalty plus interest determined by the federal short-term rate. Interest begins to accrue on unpaid taxes one day past the due date and compounds daily until paid in full.
If you fail to file and also fail to pay on time, the failure-to-pay penalty is waived and you only pay the higher failure-to-file penalty.
Steps Taken by the IRS
Notice and Substitute Return
Once the IRS has determined you failed to file and/or pay it will start by issuing you a notice. The IRS will then create a tax return for you based on the income information received in their system. This return will not include deductions and credits that would likely lessen your liability. Allowing the IRS to create this return for you often increases the amount of taxes owed.
Liens, Asset Seizures and Garnishments
Next, if you fail to communicate and resolve the discrepancies between the IRS generated return and your actual return, the IRS may start to seize assets in your bank accounts. If that does not satisfy the amount owed, the IRS may issue liens against your real and personal property. They may also start to garnish your wages. All this time, the interest continues to compound and the amount you owe continues to rise.
Loss of Benefits
If you are self-employed and do not file your tax returns, the Social Security Administration will not receive any reports of this income and therefore you will not receive credits toward Social Security retirement or disability benefits.
Jail
If you hide a substantial amount of assets, attempt to defraud the government or show some other pattern of wrongdoing, the IRS may pursue criminal charges resulting in incarceration.
Other Consequences
Unpaid tax debts show up on your credit report and damage your credit rating making it difficult to apply for loans. Bankruptcy may or may not resolve these issues.
You will find yourself dealing with the IRS or state tax authorities for a ten-year period. This can cause exorbitant stress and other emotional issues. Tax authorities will continue to come after any income earned which will prevent you from getting back on solid financial ground until you effectively resolve your tax issues.
What to Do to Make it Right
Start by setting up a consultation with an experienced tax controversy attorney. Your tax attorney will offer suggestions which may include a combination of some of the following resolutions:
First Time Penalty Abatement
You may qualify to have your first penalty waived if you meet certain eligibility requirements.
Applying the 90% Rule
If you paid 90% of taxes owed on time, you may be able to avoid penalties on failing to pay estimated taxes.
Your tax attorney may be able to negotiate an installment agreement between you and the IRS to put you on a payment plan that allows you pay the taxes on a timeline that you can afford.
An Offer in Compromise allows you to settle your tax debt for less than you originally owe. Certain criteria must be met to qualify.
Fight Liens, Levies and Garnishments
An experienced tax attorney can also assist you in protecting your assets and future income from liens, levies and garnishments by tax authorities.
Peace of Mind
Tax attorneys will communicate with the IRS on your behalf. You will no longer receive collection calls and notices. Those will all go through you attorney. Your attorney will analyze your financial situation and determine what relief efforts apply to your particular situation. They will help you file past returns, avoid as many penalties as possible and work towards paying off the debt in a manner that reduces the overall penalties and interest paid.
If you have failed to file and/or pay taxes and received notification of such from tax authorities please contact Murray Moyer, PLLC for a consultation. Keep in mind that for 2019 taxes, you still have time on your side. The extension of the tax deadline to July 15, 2020 allows you to file your income tax forms or a Request for Extension to File before midnight on that date. Filing for an extension is only to file the return. There is no extension allowed for payments.
Contact us for more information at (919) 846-6779.
Written by Justin Moyer on May 1, 2020.