What to do if you’ve been putting it off.
When you miss a filing deadline for your income taxes, it can be tempting to keep putting it off. In fact, many people find themselves in the situation where they’re worried about what will happen if they file late, and end up simply not filing—and then skip the next year, and the year after that.
What happens when you build up a few years of unfiled taxes? Unfortunately, if you owe money, the amount will keep growing.
How the IRS assesses late penalties on taxes
There are actually two charges the IRS places on late taxes: penalties and accrued interest.
The interest charged on late taxes is “the federal short-term rate plus 3 percent,” which is accrued daily on the total amount owed. This interest adds up quickly.
Late penalties are also assessed against tax payments. This late charge starts at 0.5%, and increases by 0.5% each month until the maximum penalty of 25% is reached—where it remains until the tax debt is completely paid off.
Beyond late penalties: What happens next?
In some cases, if you have unfiled taxes and you owe money, the IRS may file a substitute return (SFR) for you. The substitute return will be based solely on your income as reported to the IRS, and won’t include any expense deductions or exemptions to which you’re entitled. Typically, a substitute return overstates your actual tax liability.
When a substitute return is filed, the IRS begins a collection process. You’ll receive a notice that you owe back taxes; if you don’t pay the amount, the IRS may take action up to and including garnishing your wages, levying or freezing your bank account, or filing a federal tax lien against your real estate or other property.
Steps you should take
If you have unfiled tax returns, it’s important to take action sooner rather than later. You should file past-due returns right away, regardless of whether you can make full payment along with the return.
The purpose of the IRS is to collect money that is owed to the federal government. To that end, they offer several options to taxpayers who are unable to pay the full amount owed. These include:
- Installment Agreements
- Hardship Deferments
- Offers in Compromise
- Currently Not Collectible
An Offer in Compromise is a settlement to pay less than what you owe. This offer is not available to everyone—qualification for an Offer in Compromise depends on your financial circumstances.
The best option for those with multiple years of unfiled taxes is to work with a reputable tax resolution firm. Tax resolution specialists can often arrange for better payment installment plans, and can file for an OiC for you, if you qualify.
Whatever method you choose, you should address your unfiled taxes right away—the longer you wait, the more penalties add up on the amount you owe.