Here’s what happens when you fail to file taxes — and how to get back on track

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Choosing to forgo filing taxes comes with some serious consequences.

“There are two kinds of penalties: failure to pay and failure to file,” explains Atlanta, Ga.-based tax professional Leslie Pierce, of Liberty Tax. “People think, ‘If I don’t pay, that will get me in the most trouble,’ but ironically, not filing at all is even worse.”

If you find yourself behind on filing or paying taxes, here are some of the things that can happen and a few steps to get you back in good standing with the Internal Revenue Service.

Interest adds up

“The consequences for failing to file are always compounded if the taxpayer owes money to the IRS,” explains Cindy Hockenberry, EA, Director of Tax Research and Government Relations for the National Association of Tax Professionals (NATP). “Interest doesn’t stop accruing and before you know it, you could owe more in penalties and interest than the original tax debt.”

The penalty is 5% of the net tax due for each month or part of a month the return is late, with a maximum penalty of 25% of the net tax due. Interest accrues until the tax is paid. If a taxpayer doesn’t file the return within 60 days of the due date, the minimum failure to file penalty is $205 or 100% of the net tax due, whichever is less. It’s easy to rack up a hefty penalty.

Home purchases and refinances are a no-go

Looking to take advantage of low interest rates? Tax returns are one of the first pieces of paperwork a mortgage broker will request when you start the process to purchase a new home or refinance your existing property. You’ll have to wait until you’ve filed returns in order to proceed with a new purchase or refi, taking a gamble on potentially rising rates.

You might leave refund money on the table

Fear of owing money could be a motivating factor for not filing, but you might be surprised to learn that you’re eligible for a refund. “The sad thing is, there might’ve been years when people would have gotten a refund, but they didn’t know because they just didn’t do the taxes,” Pierce says.

“Each year billions of dollars of refunds are unclaimed,” Hockenberry explains, adding that individuals must file a return to claim a refund within three years from the original due date of the return. Otherwise, you forfeit that money.

Though there’s a statute of limitations on getting money back, there is no such time cap on owing money. As long as you owe the IRS, you have to pay up, either by creating a payment plan or settling on a lower amount.

Liens, garnished wages and bank account draws

The IRS is practically omnipresent when it comes to tracking down its money. “If you have a house, car or bank accounts, they can take money out of all of those places,” Pierce explains.

And, there’s no absolute rule of thumb about how long it will take the IRS to catch up with you. The agency finds out how much you may owe in a variety of ways, including by matching up documentation filed by other institutions, employers and financial entities. The process can take as much as a year or two. “Just because you didn’t get a letter right away, don’t assume you’re in the clear,” Pierce cautions.

File, even if you can’t pay right now

If you’re not yet late on the current year and you’re debating whether to file because of lack of funds to pay taxes, file on time anyway or file an allowable extension. The IRS will work with individuals to create a payment plan at a lower interest rate than you would incur if you fail to file at all.

What to do if you haven’t filed

First, get started as soon as possible. While there’s no requirement for hiring a tax professional, “it is more than wise and well worth the money you have to pay to hire one,” Hockenberry says. “If you need to submit a payment plan or an offer a compromise, a professional can get all the paperwork filed correctly and on time. This is critical because the IRS has a lot of deadlines for getting this submitted and approved. This is not a sea you want to sail alone.” Plus, not all D.I.Y. software has prior year taxes. Since tax laws change from year to year, a professional is key to ensure all of the rules (and deductions) are followed.

Next, gather your documents and make a plan. “It’s easiest to start from the farthest year back and work forward,”  Pierce explains. “It sounds counterintuitive, but there are things that might need to flow forward to the next year chronologically.” If you’re missing some key documents (like W2s and 1099s) from previous years, have your accountant request those transcripts directly from the IRS.

Finally, a tax pro can advise you about if and when to engage a tax attorney, a necessity anytime you’re going to court or dealing with liens.


Written by
Jennifer Bradley Franklin
Contributing writer
Jennifer Bradley Franklin is a multi-platform journalist and author, often covering finance, real estate and more.
Edited by
Megan Harney
Audience development editor