What Are the Penalties for Unfiled Tax Returns?

Many Americans fail to file their tax returns with the IRS each year, even though filing late or not filing at all can mean steep penalties. This may happen for many reasons—someone may not understand that they need to file a return, a taxpayer may fear their tax bill, or they may be simply procrastinating. 

It’s true that not all people need to file a tax return. But if you do and you don’t file it on time, even if you don’t owe the IRS money, you could face the failure to file penalty, other fines, interest charges, and even legal trouble down the road.

So, what is the penalty for filing taxes late? And what else can happen if you’re required to file but don’t? Here’s everything you need to know to stay in compliance with your tax return filings.

Do I Need to File a Tax Return?

First, you must figure out whether you need to file. The IRS has an online tool to help you determine whether you need to file a federal income tax return by April 15. These factors impact the result:

• Your date of birth
• Whether you are a dependent on someone else’s tax return
• Your gross income
• Whether you received Social Security or railroad retirement benefits

The IRS has income thresholds that determine who needs to file. For 2024, single filers under 65 need to file a return if their gross income was $13,850 or more, and those 65 or older with at least $15,700. Heads of household need to file if their gross income was $20,800 or more under 65, and over 65 if their gross income was $22,650 or more. Here are the numbers for married couples:

• Married filing jointly under 65 (both spouses): At least $27,700 in gross income
• Married filing jointly 65 or older (one spouse): At least $29,200 in gross income
• Married filing jointly 65 or older (both spouses): At least $30,700 in gross income
• Married filing separately: At least $5 in gross income

If you’re self-employed, you have to file an annual tax return if you made at least $400 from your self-employment. That’s net self-employment income, meaning your income after you pay business expenses.

Don’t forget there are benefits of filing taxes beyond just staying in tax compliance and avoiding penalties. You may get a refund back, depending on what you’ve already paid throughout the year. Filing a tax return also helps you understand exactly how much income you brought in for the year and helps you organize your finances.

Penalties for Not Filing Taxes

You may not file your tax return for a number of reasons. Common ones may be:

• You forget
• You don’t know when the deadline is
• You don’t know you have to file a return
• You’re worried about your financial situation
• You can’t afford tax help

Whatever the reason may be, you’ll face consequences if you don’t file your return. What is the penalty for filing taxes late? 

The first penalty to be aware of is the failure to file penalty. This penalty is 5% of your unpaid tax balance for every month, or a partial month, that your return is late. However, this penalty won’t be more than 25% of what you owe. The failure to file penalty hits its max after five months.

The next penalty to understand: failure to pay. This penalty is 0.5% of your unpaid taxes for every month you don’t pay. This penalty also won’t exceed 25% of what you owe. 

There may be instances where you’re hit with both of these penalties—i.e., if you don’t file your tax return and you also don’t pay the taxes you owe. When this happens, the failure to file penalty will go down however much your failure to pay penalty is for that month. But once the failure to pay penalty maxes out, the failure to pay penalty will continue at full force. Together, these penalties can get up to 50% of your balance.

What You File Late but Are Getting a Tax Refund?

The good news is that you won’t be charged a failure to file penalty if the IRS owes you a refund, even if you miss the filing deadline. But, you want to avoid filing late so you can get your refund as soon as possible. 

Another reason is the statute of limitations. The IRS has three years from your filing date to initiate a tax audit, and they get another three years if they believe you’ve understated your income by at least 25%. However, that timeline only starts once you’ve filed your return, so the IRS could have a lot more time to audit you if you don’t file. 

It’s never a good idea to avoid filing your tax return, even if you don’t owe the IRS money. Stay in good standing and get your refund faster by filing on time—by April 15 or the next business day each year.

Other Consequences of Not Filing Taxes

So what else can happen if you don’t submit a tax return, beyond the penalty for not filing taxes? Here are a few additional potential consequences you need to be aware of: 

Interest Charges

One component of penalties that many people overlook is interest. The IRS changes interest on all penalties the agency issues. The amount will depend on the type of penalty, but the interest balance continues to increase until you pay the full balance of what you owe. So, interest charges can be significant, especially if you keep waiting to file or pay.

Underpayment of Estimated Tax by Individuals

There’s also a penalty specific to self-employed people. The underpayment of estimated tax by individuals penalty applies if you’re supposed to pay quarterly estimated taxes but miss the deadline or don’t pay enough. 

You could get this penalty even if you’re owed a refund. The amount of this penalty will vary based on the amount of underpayment, the applicable tax period, and the interest rate for underpayments.

Missing Out on Your Refund or Tax Credit

Another consequence of not filing is not getting your tax refund back. You can’t get a refund from the IRS if you don’t file. You could risk losing your refund if you don’t file within the given three-year window.

If you qualify for refundable credits like the child tax credit or the earned income tax credit, you also must file a return to receive it, even if you wouldn’t otherwise need to file a tax return. You also have three years to file and receive these credits.

Personal Financial Consequences

If you’re self-employed, you typically need a tax return to prove your income to lenders, and if you don’t file, you may not be able to get car loans, personal loans, or mortgages. When trying to get a mortgage, you may need to provide a tax return even if you have a W2 or other proof of income from an employer. If you don’t file, you may miss out on lending opportunities.

Legal Trouble

Finally, let’s talk about civil and criminal charges. You could face legal trouble in several forms if you continue to avoid filing your tax return or paying what you owe. Note that the IRS won’t put you in jail if you don’t file your tax return one year. Typically, if you owe money to the IRS and fail to file, the IRS will continue to send you notices and issue penalties. They may then issue a federal tax lien against you and they could seize your assets. This usually doesn’t lead to jail time. 

However, if the IRS believes you willfully conducted tax fraud or evasion, you could face high penalties and even criminal charges with potential jail time. 

While it’s very rare that the average person goes to jail for failing to file, you never want to make your situation worse. Always file your return and pay what you owe as soon as possible. Talk through your situation with a tax expert when you’re struggling with your tax obligations.

When Does the IRS File an SFR?

In certain situations, the IRS may file a tax return for you when you fail to do it. This is called a substitute for return (SFR). This could happen if the IRS received information about your income from employers or payers, like W-2s or 1099s, and you didn’t respond to any of the IRS’s notices or actions to get you to file your return. If you continue to not pay what the agency determines you owe, you could face additional penalties and even asset seizure.

But note—the IRS won’t include your deductions on an SFR, like business expenses. So, you could end up owing more if the IRS files for you. It will still be your responsibility to file the outstanding return to take any deductions or credits you qualify for.

Steps to Avoid Failure to File Penalties and Consequences 

It’s never fun to realize you have unfiled tax returns or unpaid taxes. Fortunately, there are steps you can take to avoid failure to file penalties and further consequences. Let’s look at some of those strategies:

• File and pay on time: The best thing you can do to stay compliant is file your tax return by the annual deadline (usually April 15). If you bring in self-employment income, you may also need to pay estimated taxes by the quarterly deadlines (usually April 15, June 15, September 15, and January 15). 
• Pay your tax balance in full by the deadline: Even if you request an extension, your taxes are due on the April 5th deadline.
• Pay attention to tax law changes: Keep up on tax trends and laws that impact you. Consult with a tax professional when you’re not sure if a change applies to your situation. 
• Get penalty relief: If the IRS issues a penalty against you, you could get relief in these forms:
  • Reasonable cause: If you can show the IRS you “acted with reasonable cause and in good faith,” you may qualify for penalty removal or reduction. Acceptable reasons could be a natural disaster, death of a family member, or serious illness.
  • First-time penalty abatement: If you have a history of good tax compliance—during the last three years, you filed on time and didn’t get any penalties—you could receive first-time penalty abatement, which reduces or removes a penalty for failure to file, failure to pay, or failure to deposit.
• Apply for a payment plan: When you can’t afford to pay your tax bill in full, consider applying for an installment agreement. The IRS will work with you to get your balance paid off in monthly installments over a set period of time. 
• Apply for an offer in compromise: If you can’t afford your tax bill because of financial hardship, you could ask the IRS to settle your debt for less than your balance. You will send in an offer, and the IRS will consider if this is the only amount they can reasonably expect to collect from you. 
• Stay organized: Sometimes taxpayers miss a deadline simply because they forget about it or don’t have all their information prepared. Create a system for automating deadline notifications and keeping your records organized and accessible. 
• Apply for an extension: You can also ask the IRS for a tax filing extension, which gives you an extra six months to file. However, the extension doesn’t apply to the amount of tax you have to pay by the deadline. It just gives you more time to file.

You have options if you’re struggling to file your tax return or pay your balance. Never ignore tax deadlines or notices from the IRS. The best thing you can do is stay proactive and act fast when an issue arises. 

Seek Professional Tax Help to Avoid Unfiled Returns

Don’t put off filing your tax return. Even if you’re dealing with a financial hardship or are unsure of your tax requirements, it’s important to talk to a tax expert instead of ignoring tax laws. A tax professional can guide you through all requirements that apply to your situation. They can also help you apply for relief when you need it.

The team at Damiens Law is here to help you avoid unfiled tax returns and the late tax penalty. We make sure that you get back in good standing with the IRS so you don’t have to deal with additional penalties, interest, or legal trouble. Get in touch with us today to learn how we help.