When mid-April rolls around, it gets to be crunch time for filing your federal taxes. The appeal of taking a mulligan and simply blowing off your taxes this year might sound appealing, especially if you slip up and miss the filing deadline.
If you’re considering skipping out on taxes this year, here’s a look at what you can expect.
The first thing you can expect to happen is nothing, at least not for a while. Police will not show up at your door on April 16 and arrest you for tax evasion. Depending on your circumstances, the IRS might not ever notice that you didn’t file. However, if you earned income in the past year, there is more than likely a paper trail that will eventually set off a red flag in the IRS computer system.
“In today’s electronic world, with so much cross-reporting and oversight, it is getting much tougher to fly under the tax radar,” says Eva Rosenberg, publisher of TaxMama.com. “Employers are no longer as willing to hire well-paid workers without either putting them on payroll or issuing them a Form 1099-MISC so they can file as independent contractors.”
The next step in the process is typically a letter from the IRS informing you that they have not received a tax filing for the year(s) in question. The letter will generally contain a new filing deadline, but you shouldn’t take that to mean that you’ve been given a free pass. The IRS failure-to-file penalty starts at 5% of your total tax bill and maxes out at 25%. In addition, the IRS charges compounding interest on the taxes you owe.
The exception to these penalties and fees is taxpayers who are actually owed a refund. If you are owed a refund, you won’t get charged a late filing fee, but you obviously won’t get your refund until you file. After three years, you run the risk of forfeiting your refund.
The IRS Takes Your Money
If you are still feeling defiant enough to ignore the IRS letters and refuse to file, the IRS will file a return for you. And don’t expect them to be generous. Your filing status will be set to single, no deductions will be taken whatsoever, and sales of securities will be reported as 100% profit.
If you still choose to ignore the IRS version of your tax return, the government then has the legal authority to begin coming after your assets. The IRS doesn’t even need to go to court to seize assets in your bank account and/or garnish your wages.
If you’re a thrill seeker or simply lazy, the moral of the story is this: file a tax return. It’s not worth the risk.
If you are concerned that you will not be able to pay all of your taxes due to your current financial situation, Rosenberg says you should still file. If you ask the IRS for an installment agreement, it can grant you up to 10 years to pay off your tax debt in installments. In addition, the IRS could agree to an Offer in Compromise that greatly reduces your tax bill, though these requests are rarely granted.
Paying taxes is never fun, but the alternative can lead to some major financial headaches.