It’s not great, but it’s not the end of the world.
Life is complicated, and there are a million reasons why someone might not have filed taxes for a few years. But once you’re there, what do you do about it?
It may seem like a deep hole, but it’s easier to get caught up than you probably think.
The basics
- You will be fine
- There might be some fees if you owe taxes, but if you’re owed a refund, you’re good
- The IRS will work with you to figure something out
- Hire a tax pro and we’ll sort you out
What happens if I don’t file taxes?
The actual consequences of not filing taxes depends mostly on whether you owe taxes or are owed a refund.
If you’re a W-2 wage worker, chances are you get refunded every year for the tax payments that are automatically withheld from your paychecks. In that case, you probably don’t have any fees or legal consequences to worry about.
However, if you normally owe taxes – like if you’re self-employed or own a business – you probably owe more than if you’d paid on time.
The IRS doesn’t necessarily know the specifics of your situation, so you may get a notice in the mail even if you don’t actually owe them anything. It could take a while, though – even if you owe taxes, it can sometimes take the IRS years to get around to you.
IRS penalties and fees
For individuals who don’t owe any taxes, this won’t be a problem for you.
But if you do carry an unpaid tax balance, there are penalties levied for both failure to file and failure to pay. Both types of penalty increase for every month the balance goes unpaid, and max out at 25% of your total unpaid taxes. Plus interest.
The failure to file penalty accumulates much faster than the penalty for failure to pay, so it’s important to file as soon as possible, even if you know you can’t pay your taxes yet.
When it comes to businesses, some of them are similar to individual tax returns: you only owe fees and penalties on unpaid taxes. However, some types of business are required to file a tax return no matter what. A partnership (Form 1065), for example, faces a penalty of at least $210 for failing to file. For that reason, it’s important for a business owner to know their own tax situation, or to work with a professional who does.
Other negative consequences
Banks can see some of this information, so if you don’t file (or pay) your taxes regularly, you may find it more difficult to access credit. You may not be able to get a mortgage or a lease.
This is especially true for businesses seeking credit.
How do I get back on track?
Don’t panic!
Seriously, that’s the most important thing. The situation is usually not as dire as it feels, and there are solutions available. You are very unlikely to go to jail for unpaid taxes.
But the IRS does appreciate open communication, so if you receive a notice about unpaid taxes in the mail, don’t ignore it. If you don’t reply, and you owe taxes, that’s when they can initiate a collections action against you.
Any kind of response will let them know you’ve seen their notice and are aware of the situation, and that’s all they want from you immediately. Once they’ve heard from you, the IRS is usually more than happy to work something out.
The process
First, check your status with the IRS. Use your IRS account or set one up if you don’t have one already.
Next, you’ll need to find all the financial documents that may be relevant to your taxes. If you’re missing anything, your former employers or your bank can often help fill in the gaps.
Then you can file your missing tax returns, figure out what you owe (if anything) and start resolving things.
If you’re owed a refund, great! Good thing you ended up filing. And if you owe taxes to the IRS, this is the part where you can negotiate how you’re going to start paying them back.
What documents?
As far as documents go, you’re basically just looking for anything that can corroborate what you’re putting on your tax returns for previous years.
- For individuals: That means W-2s, 1099s, etc. Anything that confirms your income, tax withholding, stuff like that.
- For businesses: We’re looking for your usual financial documents, bank statements, expenses, income, especially anything that can confirm your deductions.
How to pay your balance
If you do end up having an owed tax balance to pay off, you have a few options on how to proceed.
First, you could just pay it! That’s going to be your best option. If you have the funds ready-to-go, why not solve the problem, and stop worrying?
But if you’re unable to pay it all in one lump, the IRS will let you find another way to resolve the issue. Those options include:
- A payment plan, short-term or long-term. This is your second-best option and will let you pay things off at a reasonable pace. Penalties and interest will continue to accrue, but it’s not as big a deal when you’re reducing the balance at the same time.
- You can apply for an Offer-In-Compromise, negotiating your tax bill down to whatever the IRS thinks they can reasonably expect from you. There’s a pretty specific set of qualifications for this, but it can help if you’re stretched financially.
- If your situation is particularly dire, you can also get a “Currently Non-Collectible" status, but that’s the last resort. If you convince the IRS that you can’t afford both your tax bill and your living expenses, they will stop trying to collect from you, but interest and penalties will continue to accumulate.
Hire a tax pro!
For an individual with a steady job and a paycheck, catching up on your tax returns may not be that complicated. But for those with more intricate taxes, like the self-employed or business owners, you might want a little help.
A CPA or some other qualified tax professional will have experience working with the IRS, and they can negotiate on your behalf. They’ll be better equipped to have clear and effective communication about resolving your tax situation.
For business owners, you may want help cleaning up your financial books and finding all the relevant information for your tax returns. A little bit of accounting support can go a long way.
You may also just be a busy person with a lot going on. If your time is particularly valuable to you, or if you just don’t want to deal with it (we get it, honestly), this is probably the fast and simple solution.
And finally, a tax professional can help set you up to handle future taxes accurately and on time. Worst case scenario, they’ll have you file an extension.
The bottom line
If you’re having flashbacks to missing homework assignments in school, don’t panic. While failing to file your tax returns isn’t great, particularly if you owe a balance, it’s not the end of the world either. The IRS doesn’t want to put you in jail, they just want you to pay your taxes.
The most important thing is to start working on the problem sooner rather than later. The earlier you get it done, the less can potentially go wrong.
And to resolve the situation with minimal stress – and to avoid it in the future – schedule a call with the tax team at DiMercurio Advisors. We’ll make sure you never miss another return.
