The IRS never forgets. It’s evident from various news flashes about people being chased around for non-payment of taxes, for years. In one such instance, the Internal Revenue Service followed the trails of a company and collected a 30-year old tax debt! In 1982, the company was unable to pay off its tax debts due to insufficient fund, and later filed for bankruptcy. The IRS, in addition to the actual amount owed, charged a penalty of 100 percent for tax evasion. Examples like this remind us of the persistence, power, and reach of the IRS.
In this post, we discuss the finer lines of the consequences of failing to file your IRS taxes.
Taxpayers must file their tax returns within the stipulated timeline to avoid late payment penalties. The penalty for late filing is applicable following April 15 every year, which equals five percent of unpaid taxes you owe every month. The combined penalty for failure to file and pay can eventually add up to 47.5 percent (22.5 percent for late filing + 25 percent for late payment) of the tax you owe.
Tax Refund Forfeiture
The IRS does not hold back your tax refund for an indefinite period. When you owe a reimbursement from the Government, it gives you three long years after the year of filing taxes to claim your tax refund. If, however, you cross this timeline, the IRS forfeits your unclaimed refund.
Delayed reimbursement of your tax refund is one of the harsh consequences of filing your taxes late. Filing your taxes at the last moment and claiming refunds not only results in paying a penalty but also, holding up refunds with the IRS. In fact, if you file your taxes late, you are unable to save or invest that money to achieve higher returns.
Substitute for Return (SFR)
The IRS makes several attempts to contact delinquent taxpayers and remind them of filing their taxes within the stipulated time period. It also reserves the right to prepare and file a substitute for return (SFR) on behalf of the taxpayer that calculates payable taxes based on taxable income and the applicable penalties.
When preparing the SFR, the IRS does not consider if you were married jointly filing taxes, had dependents to claim for that year, and any deductions or credits that may minimize your taxable income. You, therefore, end up paying more taxes based on SFR calculations. If you still fail to pay the taxes that the IRS has assessed against you, it starts collection proceedings to collect the outstanding taxes.
The discussion in this post consolidates the fact that tax evasion is impossible as the IRS always follows tax trails. It is, therefore, advisable to file your tax returns on time not paying your taxes at all. Consulting a tax attorney can help you to resolve all your IRS-related issues. If you wish to learn more about the implications of IRS tax evasion, or need expert advice on tax management, feel free to connect with one of our representatives for a no-obligation consultation.