Admit it. At some point during tax preparation, a dangerous thought may cross your mind: What if I just don’t file? And while you likely file your taxes anyway, you may wonder, 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 a CPA arranges your taxes for you, 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 its version of your tax return, and it requires that you either accept the tax return it sent, submit 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, the IRS will send you another, harsher letter giving you 90 more days to respond.
Those 120 days might sound like a tax holiday, but during this time, your unpaid taxes rack 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 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 do not 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 include tricks such as putting your assets in another person’s name, or receiving pay 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, such as willful failure to pay tax or file a return. That charge still carries a prison sentence of up to a year, as well as stiff fines.
Once the IRS figures out how much you should have paid, do not try to ignore its attempts to contact you. If you don’t respond to any 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, you have numerous options – aside from 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 15th), 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 the IRS 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 can 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, which allows you to set up a monthly plan to pay off the debt. Generally if the debt is small (less than $10,000) and you’ve been good otherwise 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?” Unfortunately, these plans can be tricky to negotiate, so you may well need an expensive accountant or tax attorney. Furthermore, applying for a compromise comes with a $150 price tag.
For the compromise, you can offer the IRS either a single lump-sum payment or a payment plan for up to 24 months. Either way, the total comes 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, it is allowed to accept the money and reject the compromise. It can choose to apply what you pay toward your debt and continue collection efforts on the remainder.
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, be sure to call and inform the IRS. Being 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?