What Happens If You Don’t File A Tax Return?

By John Ellsworth, Esq December 1st, 2011

What If You Don’t File Your Tax Return?

One thing is for sure with the IRS, your non-filing will eventually float to the surface and you’ll be found out. What happens if you don’t file? Tell the truth, most people–and rightly so–are too frightened to find out. Warning: Never mess around with the IRS. Depending on the nature of the actual return, you are either faced with paying interest or even worse, penalties. Any tax audit lawyer can recite countless tales of people who fudged on their expenses and wound up owing more in interest and penalty than the tax itself.

Interest If You Don’t File Your Return

Interest runs. And runs and runs and runs! Interest on underpayments runs from the extended due date of the tax return, which is April 15th of any tax year. The usual interest rate is defined by law, but if you underpay you incur a 1% premium rate. Under the Internal Revenue Code, your interest rate is figured on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. Rule of thumb: You’ll do better borrowing the tax payment from the bank than from the IRS. Usury anyone?

Plus There Are Penalties For Non-Filers

Penalties will be called either failure to file or failure to pay penalties which will automatically be assessed by the IRS.

The failure to file or (FTF) penalty is assessed by the IRS at a rate of 5% per month or partial month up to a 25% maximum. The failure to pay (FTP) penalty is assessed by the IRS at a rate of 0.5% per month or partial month up to a 25% maximum. If both the FTF and FTP penalties are assessed, the FTF penalty is reduced by the FTP penalty.

As above, there are also underpayment penalties owing to some fault of the taxpayer. However there are also the following penalties, listed in order of their severity.

  • Criminal fraud. Also commonly known as tax evasion. Illegal, of course. If convicted of this crime a taxpayer will be subject to heavy court fines, imprisonment or both.
  • Civil fraud: This is essentially taxpayer fraud that does not rise to the level of criminal fraud. If imposed, the penalty is 75% of the portion of tax underpayment attributable to fraud. Talk about hard time!
  • Negligence: This penalty is based on the accuracy of the return. The penalty is imposed if any part of the underpayment is due to taxpayer neglect or disregard of the tax rules and regulations without the intent to defraud. The penalty is 20% of the portion of the underpayments attributable to the negligence.
  • Frivolous Return: A frivolous return is one that omits certain information necessary to determine the taxpayer’s tax liability, such as Social Security numbers or employment details. These returns are most often filed by people the IRS labels “tax protesters.” This is a terrible label to receive from the IRS; it follows you for life, even if you finally decide to go straight and file accurate and complete returns. The penalty is $500 for each frivolous return filed.

Don’t Forget The Tax Extension

If  it’s getting close to the wire and you still don’t have all your tax information together, you still can file a tax extension. What you’re trying to do here is to pay an estimated tax in the event that you owe. If you haven’t paid any tax throughout the year, or underpaid, then the same interest and penalties would apply.

Suffice it to say that your failure to file a tax return and pay your appropriate tax bill can be of serious consequence. There are many high profile cases of individuals who failed to pay their tax bill. If the big names can’t cheat the IRS, why do you think they might cut your some slack? They don’t go easy on anybody else.

This entry was posted on Thursday, December 1st, 2011 at 6:21 pm and is filed under tax crimes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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