business tax problem

Filing a tax return isn’t exactly anyone’s favorite chore, but it is a necessary part of managing your finances every year. In some cases, failing to file your taxes could mean giving up your tax refund. In other cases, failing to file your taxes could mean that your debt to the IRS will continue to grow as interest and penalties accrue. 

Learn more about why it’s so important to file your tax returns on time, every time, and what may happen if you fall short.

Who Needs to File Tax Returns?

The majority of U.S. citizens and permanent residents who work in this country are required to file a tax return. If you earn at least the standard deduction for your age and filing status, you must file your taxes. 

For tax year 2024, that amount is $14,600 for single individuals, $21,900 for those filing head of household, and $29,200 for married couples filing jointly and qualified surviving spouses. The standard deduction increases slightly if you are over the age of 65. Married couples who file separately may need to file if their income is as low as $5.

You also must file if you have earned more than $400 in net earnings from self-employment, owe any special taxes on Form 1040, received certain MSA distributions, owe FICA taxes on tips, owe household employment taxes, or received an early withdrawal from an IRA or 401(k).

Why You Should File—Even If You Aren’t Required To

Even if you aren’t legally required to file a tax return, doing so is often in your best interest. If you had income tax withheld from your pay, made estimated tax payments, qualify for the EITC, qualify for a child tax credit, or qualify for other tax credits, you should still file your return. You’re likely owed a return, and you won’t get it unless you file your tax return.

The Three-Year Rule

The IRS has a three-year window of opportunity during which you can file old tax returns and claim your refund. But if you do not file a tax return within three years, that money is given to the U.S. Treasury.

Penalty for Not Filing: The Failure to File Penalty

The failure to file penalty assessed by the IRS can add a significant chunk of change to your tax bill, especially if you wait months to file. The total amount eventually owed is determined by how late you file and the size of your tax bill. 

The failure to file penalty is 5% for each month or part of a month in which your return is late. This penalty maxes out after it reaches 25% of your unpaid tax amount, but after that, the failure to pay penalty will continue to accrue. Together, these penalties can get up to 50% of your tax bill.

The IRS also has a minimum failure to file penalty for returns that are more than 60 days late. Returns filed after the end of 2023 that are at least 60 days late are subject to a minimum penalty of $485 or the total value of your underpayment—whichever amount is less.

How the Penalty Snowballs Over Time

It’s easy to see how one missed tax return can lead to a sizable debt owed to the IRS. Imagine you fail to file a tax return for the year and the IRS determines that you owe $4,000 in taxes. The first month, you add a penalty of $200 to your tax bill. 

However, the IRS also charges interest on penalties. Let’s use the current interest rate for the second quarter of 2024—8%, or about .022% per day. The IRS compounds interest daily. After one month, your $4200 tax bill would be approximately $4,230. 

The second month, you get another $200 penalty. The interest continues adding up on the new amount, plus everything else that you’ve already accrued interest on. After five months, your penalty would max out, but you’d also have to add interest for the entire time period. Your initial $4,000 tax bill is now over $5,100.

What About the Failure to Pay Penalty?

Assuming you owe taxes for the year for which you failed to file a return, you also have to add a failure to pay penalty. This penalty is much smaller—just 0.5% of the unpaid taxes for each month or part of a month in which the tax remains unpaid. If both penalties apply, the failure to file penalty is reduced by the amount of the failure to pay penalty, so your damage is limited to some extent. Note, though, that the failure to pay penalty is applied retroactively. It begins accruing the day that your payment is late.

Other Consequences of Failing to File

Beyond the penalties you pay when you don’t file your taxes, there are other consequences that can hurt you financially or negatively impact your life.

Difficulty Securing Credit

You may find it very difficult to secure credit without two years of recent tax returns. This is especially true for mortgages, auto loans, and other sizable loans. This can also affect you if you apply to rent an apartment. While some places will accept paystubs as proof of income, those are increasingly easy to fake with online tools and photo editors. This has led many lenders and landlords to require official tax returns. 

Not having a tax return to back up your income can cost you a significant amount of money. For example, if you apply for an FHA mortgage, you can put down as little as 3.5%—but you typically need two years of tax returns. If you want to qualify based on what’s in your bank account or paystubs alone, plan on putting down at least 20% to 30% for a no-doc mortgage.

Interest Charges

At first glance, an 8% interest rate doesn’t seem terrible, especially if you plan on paying off your tax debt in a matter of months. But when you compare it to other types of debt, it’s easy to see how your tax bill can spiral out of control. 

Interest on your taxes compounds daily, while most types of loans compound on a monthly basis. This means that from the very beginning, you are paying interest on the interest you have already accrued. Unless you get a payment arrangement in place, your tax bill could quickly be taken over by interest.

Levies and Liens

If you continue to fail to file your tax return, the IRS will eventually move on to more aggressive collection tactics. They may place a lien on your property, which can make it difficult to get credit or sell your property. They will eventually seize your property or garnish your wages, causing serious financial difficulties.

Estimated Tax Payment Penalty

If you are required to make estimated tax payments every three months and you underpay or miss a payment entirely, you’ll face additional financial penalties. This penalty is based on taxes accrued, how much you underpaid, and the interest rate for the underpaid amount. As you may expect, interest is also charged on this penalty.

Is it Criminal to Not File a Tax Return?

For the vast majority of taxpayers, failing to file a tax return is not a criminal matter. Most people fail to file taxes because they are overwhelmed, they have unorganized paperwork and documentation, or they know they can’t afford to pay their taxes and assume it’s better to wait until they can pay. It’s not usually a nefarious effort to deny the IRS the taxes they are owed. 

But if an individual’s or corporation’s failure to file is considered tax evasion or tax fraud, then it is a criminal issue. The IRS targets individuals and businesses who intentionally underreport their income or otherwise try to avoid paying what they rightfully owe. Remember that criminal charges take a substantial amount of time and money, so the IRS isn’t out there trying to take down everyone who makes a mistake on their taxes or fails to file a tax return.

Potential Penalties and Consequences

The penalties you face for tax evasion vary. You could be sentenced to up to five years in prison and fines as high as $250,000, and these penalties can add up if there are multiple charges against you. Again, remember that these are the worst possible outcomes. Most taxpayers simply have to pay what they owe, plus interest and penalties.

You Haven’t Filed Your Taxes—Here’s Where to Start

Whether you haven’t filed your taxes for one year or several, don’t panic. There are ways to mitigate your financial losses and become compliant with IRS requirements. It can be overwhelming, but many taxpayers find that they experience immediate relief once they address these problems head-on instead of ignoring them.

Importance of Voluntary Compliance

It is crucial that you take action and file your returns before the IRS conducts an audit or begins investigating you. While you still have options if you want to address your tax concerns mid-investigation, you have far more options if you take action earlier.

Filing Your Returns

The IRS states that you should file any past-due tax returns as soon as possible. This may mean setting aside a weekend, gathering your W-2s and other tax documents, and pushing through them. If you are so overwhelmed that you can’t make any progress, consult a tax professional—it’s better to pay a professional and get on top of your tax issues than to continue to let your past-due returns pile up. Make sure you have all of your documentation in order, mail your tax returns, and keep an eye on your IRS online account. This will tell you when they receive your returns, when they process them, and what you ultimately owe.

Look Into Payment Options and Penalty Abatement

Even if you owe a substantial amount of money, it should bring you some relief to have an answer from the IRS. This gives you a starting point for planning for the future. You can begin exploring payment options, negotiating a settlement with the IRS, or taking other steps to address your tax issues. Potential options include:

If you have multiple years of unfiled tax returns, the penalties alone can be financially devastating. In some circumstances, the IRS will provide relief from your penalties. This is generally available to those who have never had penalties or requested abatement in the past. If you have a history of good tax compliance, that will definitely help your chances. Note that even if they waive your penalties, the failure to pay penalty will accrue until the balance is paid off. 

Get Help With Unfiled Taxes

Wondering if it’s time to seek professional assistance? If you have known that you’re in tax trouble for some time but you’ve avoided taking action because you’re overwhelmed by the work involved, afraid to find out how much you owe, or just not sure where to start, meeting with a tax attorney can empower you to take action. 

Let us help—our firm exclusively handles tax cases, so no matter how complex your situation is, we’re here for you. Call Seattle Legal Services at 206-536-3152 or get in touch online to get started.