Admit it. At some point during tax prep – filling in one too many data fields or just finding out the final total you owe to Uncle Sam – a dangerous thought crosses your mind: What if I just don’t file?
While most people resist the urge to simply skip out filing taxes, what happens if you can’t pay your taxes, or if you just don’t file at all?
Here are some of the details on tax evasion, including some of the penalties involved, as well as what you can do to prevent a sticky situation even if you can’t afford to pay.
Passing Up the Tax Paperwork
First, not filing and not paying are two very different violations, with different penalties. If you don’t fill out the forms and send them in, the IRS can still determine your tax liability based on your W-2s, 1099s, or other tax documents. Whether you do your own taxes or visit a CPA, passing the work on to the IRS might sound like the cheaper, easier, more attractive option. Leaving the work to the IRS requires no effort, but they’re not exactly going to look for extra deductions on your behalf. The final result will end up weighing heavily in their favor.
The IRS will mail you a letter with their version of your tax return, and they’ll require that you either accept the tax return they sent, send them one that you completed, or fill out a form stating why you don’t need to file a tax return at all. You’ll have 30 days to respond to this letter. If you don’t respond, they’ll send you another, harsher letter giving you 90 more days to respond.
Those 120 days might sound like a tax holiday, but your unpaid taxes are racking up serious fees and interest charges. You’ll get slapped with a penalty of 5% of the unpaid amount for each month and part of a month that you don’t pay, up to a total of 25% of the original amount you owed.
In comparison, if you or your accountant filed your paperwork, but you didn’t pay everything you owe, the penalty is “only” 0.5% per month on the unpaid amount. The 25% cap still applies. If you didn’t file and didn’t pay your taxes, the penalty is capped at 5% per month or part month. If you’re more than 60 days late filing the return, you’ll also face a minimum fee of $135 on top of the penalty. These late fees add up, but nowhere near as quickly as the costs of not filing at all.
Though the financial charges for not filing or not paying on time are steep, you generally won’t need to worry about major federal charges of tax evasion unless you’re intentionally avoiding them. Criminal tax evasion involves not only not paying your taxes, but also demonstrating a willful attempt to avoid paying and taking specific actions to avoid generating financial paperwork. These specific actions are tricks like putting your assets in another person’s name or getting paid under the table to avoid getting a W-2.
Don’t take that strict definition as permission to skip filing every now and then. You can still get hit with other charges, like willful failure to pay tax or file a return. That charge still carries a prison sentence of up to a year, and stiff fines.
Once the IRS figures out how much you should have paid, how are they going to get their money if you avoid them? If you don’t respond to any of their letters or calls, the IRS will start to reach into your pockets using these common methods:
- Garnishing wages from your paycheck
- Taking any tax credits or refunds that may eventually be due to you
- Pulling money straight out of your bank accounts
- Placing liens on any property you owe (preventing you from selling, and damaging your credit score rating)
If you can’t afford the taxes you owe, what are your options other than piling on fees or facing jail time?
1. Getting an extension
A tax filing extension gives you more time to put your tax return together, but does not change your payment deadline. Even if you don’t know the exact amount you owe, you still need to pay by the tax filing deadline (usually April 15), whether you complete your return before or after that date. You’ll end up estimating what you owe, paying on time, and getting a refund if you overpay. While the extension buys you up to 120 days, interest still builds up on any unpaid amount while you’re waiting to file.
2. Explain extenuating circumstances
If you’ve had an abnormally difficult year, the best move is to simply call the IRS office nearest you and explain your situation. The experience may be humbling, but you’re not the first person to need to make the call, and you won’t be the last. If you filed or paid late for a good reason, such as hospitalization or natural disaster, you can write a letter or file Form 843 to ask them to waive penalties and fees. You might be surprised how understanding the IRS can be when you’ve faced a tough situation.
3. Pay Using Installment Plans
If you can’t afford to pay your taxes, the IRS has several options to help you pay without landing you in hot water or charging excessive fees. You need to contact the IRS as soon as you know you won’t be able to pay, before the deadline if possible. An automated process triggers the fees and penalties starting after the tax deadline, so alerting the IRS early will help you avoid getting caught by the computers.
The most common help the IRS lends is the installment plan. This IRS tax payment plan comes with a small fee and a form to file, either by phone, online, or on paper, and you’ll set up a monthly plan to pay off the debt. Generally if the debt is small (under $10,000) and you’ve been otherwise good about filing and paying your taxes in recent years, the IRS will automatically accept your installment plan.
4. Ask for an Offer In Compromise
What about those commercials that show people who’ve settled a whopping debt for pennies? That’s called an offer in compromise. You’re basically telling the IRS, “Here’s all I have. Will you take it and forgive the rest?” These plans are tricky to negotiate, so you’d need an expensive accountant or tax lawyer, and applying for a compromise comes with a $150 price tag.
For the compromise, you can offer the IRS either a lump sum or a payment plan for up to 24 months, and the total will come to less than your original tax owed. When applying for a lump-sum compromise, you must submit at least 20% of the tax debt up front. And when you send the IRS money as your part of the offer in compromise, they are allowed to accept the money and reject the compromise. They can choose to apply what you send them towards your debt and continue collection efforts on the rest.
Hopefully you never need to seriously consider delaying your payment or not filing. But if you’re unable to make your tax payments by the deadline, please call the IRS and let them know. Being up front and proactive about your situation will prevent fees, penalties, and interest from snowballing the original debt and causing bigger headaches down the line.
Have you faced overdue tax trouble? How long did it take you to resolve the problem?