Haven’t filed your income taxes in several years? You’re not alone.
Unfortunately, taxes do not just go away when you ignore them. Not filing your taxes can have serious consequences, but there are options - none of which include going to jail or emptying your wallet.
If you haven’t filed in years, here’s what you need to know.
The IRS has several tools for enforcing tax filing and payment.
The highest penalties are for failure to file a tax return. The penalty is 4.5% of the total unpaid debt, charged monthly until it reaches 25% of the debt.
From there, the penalty continues at 0.5% until the debt is paid in its entirety. In the second month, the IRS may add a penalty of $210 or 100% of your tax liability, whichever is smaller.
If you didn’t file a tax return, the IRS likely filed a Substitute for Return on your behalf. However, the agency files it as single or married filing separately. You will not receive the exemptions for married filing jointly or head of house that are rightfully yours.
In addition to the failure to file penalty, you are assessed 0.5% of your tax liability for failure to file. The IRS adds the penalty monthly up to a maximum of 25% of your unpaid tax debt. It isn’t as hefty as the failure to file penalty, but it still adds up.
Combined, the failure to file and failure to pay penalties can eventually reach up to 47.5% of your tax bill. Not to mention interest accrual, which is typically between 3% and 5%.
To get back into the federal government’s good graces, you must file six years of back tax returns. IRS management must approve any deviation from that rule.
However, you can only claim refunds, if you are owed one, on the three most current tax years. Sometimes an IRS manager requires returns from farther back, depending on your situation.
For example:
As a further inducement to pay your taxes, IRS policy gives the government a few enforcement tools.
Tax lien: A legal action placing a claim against property you own.
Tax levy: A legal action that allows the IRS to claim (seize) certain properties and assets you own.
A tax lien uses your property as collateral against the repayment of your tax debt, and it can be attached to property you currently own or assets you intend to buy later. Often, a lien is placed against real estate, but it can be placed on other property, like business equipment.
You may be able to appeal the lien in the following situations:
Other ways you may escape a lien include:
If you have a federal tax lien against any property, you face problems obtaining reasonable loan rates and other obstructions.
A tax levy is usually a last resort weapon in the IRS arsenal for collecting tax debt. Levies are similar to garnishing your wages and can be looked upon as a seizure of property.
The IRS can place levies on:
* A freeze on your bank accounts means you have no access to them, and if you don’t pay the tax debt or work out a payment agreement within 21 days, the bank must send any money in your account to the IRS.
You might be able to apply for a Stay of Collection to remove the levy. A stay gives you 90 days to find a solution to your tax debt problem. Or you may be able to remove a levy and return to the good graces of the IRS by:
It is possible to be charged with tax evasion if you haven’t filed or paid taxes for a few years. However, jail time is unlikely except in extreme cases and circumstances.
The cases depend on which law is violated, and the punishment depends on the value of the tax evasion. Your case also depends on whether you:
Some tax evaders receive probation for one to three years. If the terms and conditions of the sentence are violated, probation can be extended.
If you relied on a tax professional who failed to submit your taxes, and you can prove you provided the documentation, you might be able to use that fact in your defense.
Now that you are ready to reconcile with the federal government, it’s time to get your records together. You need to file the return required for the particular tax year you skipped.
The IRS keeps a tax return database for all previous years. For each year you didn’t file, make sure you have your W-2, 1099, or other earnings statements. If you are missing any information, request copies from the IRS.
If you haven’t filed or paid taxes in years, you may be looking at a good-sized tax debt, including penalties and interest. You don’t have to pay all at once if you are unable. You have several options on your side.
The first step is to find out what you owe. Unpaid tax debt accrues interest, penalties, and possibly non-compliance fees. To learn your total tax liability, contact the IRS. Don’t just add up your income since the last time you filed.
You have more options than you think to get out from under tax debt. Plus, you do not have to do this alone.
Top Tax Defenders can help you settle with the IRS. Our experienced professionals can help:
Top Tax Defenders are experienced tax professionals with 27 years of helping people with their tax problems. If you haven’t filed taxes for years, we can help gather your documentation and help you negotiate a fair payment plan or Offer in Compromise.
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