What Happens When People Don’t File or Pay Taxes

It is estimated that about three percent of people required to pay taxes do not file tax returns at all. According to the laws governing U.S. Federal income taxes, the willful failure to file taxes carries civil penalties. These penalties apply when an individual or corporation fails to file a return in a timely manner or willful fails to timely pay taxes.

Penalties are based on the amount of tax due, however, so if no tax is owed, no penalties are due.

Civil Penalty for Delayed Filing of Taxes

To calculate the civil penalty for willful failure to timely file a return, it is important to realize that the IRS generally establishes a penalty that is equal to 5.0% of the amount of tax required to be shown on the return per month, up to a maximum of 25%.

The civil penalty, on the other hand, relates to the willful failure to pay taxes in a timely manner with reference to the amount that is actually “shown on the return”; it is generally equal to 0.5% of such tax due per month. The maximum penalty is 25% of the total amount due.

The two separate penalties are, however, computed together in a relatively complex algorithm. Computing the actual penalties due can be rather complicated, however, so it is often necessary for tax payers to refer to the IRS to receive confirmation of the exact penalty fee that is being assessed.

Non-filing of Tax Return Penalty

When a taxpayer does not have enough money to pay their entire tax bill, the IRS can work out a payment plan with taxpayers. When there is no return filed by a person required to pay taxes, there is no statute of limitations on civil actions that may be brought against them. That means that the IRS can seek taxpayers and demand payment of taxes owed for any year that taxes were not filed and paid. For every year that at taxpayer willfully fails to file an income tax return on time, the taxpayer may be sentenced to up to one year in prison. There is, however, a six-year statute of limitations on Federal tax crimes.

Anyone who has not paid taxes can see relief using one of several approved methods for negotiating with the IRS, in addition to simply paying the amount owed. There is the option to make an offer in compromise and therefore to pay a portion of what is owed instead of the full amount. There is also the option to establish a payment plan to pay a specific amount over a number of months until the balance is paid off. In some cases, it may also be possible to seek an amnesty to clear a tax debt if payment is not possible.

This article is not intended to give legal advice.

The Thorn Law Group website provides more information about tax litigation. Serving clients in Maryland and Virginia.