unfiled tax return

The IRS processes over 162 million tax returns per year—but even with that workload, they are still very good at finding those who do not file or pay their taxes. It is crucial to file and pay your taxes on time. If you don’t pay on time, you will incur penalties.

If you can’t pay on time, either due to lack of funds or needing more time to get your paperwork together, there are options. It is important to be proactive, explore your options, and seek professional assistance when you’re overwhelmed.

Why You Must File Your Taxes—Even If You Don’t Have the Money to Pay

One of the main reasons people choose not to file taxes is that they know they do not have the money to pay them in full. In many cases, taxpayers hope that giving themselves a few extra months to catch up will put them in a better position to file and pay any past-due taxes, interest, and penalties. Unfortunately, this often is not the case. Waiting simply increases the amount they owe, and when their financial situation does not improve, they are under even more pressure than before to fix the situation.

The fact is that being proactive is the better choice when it comes to dealing with the IRS. They aren’t trying to penalize people unnecessarily or unfairly target those who have hit a rough financial patch. If you file your taxes, even if you cannot currently pay what you owe, you have the option of exploring different payment options. You may also avoid penalties for failing to file and failing to pay. These are two separate penalties, and unless you file on time and make plans to pay, you could see a sizable increase in your tax bill.

Penalties for Not Filing or Paying

If you fail to file your tax return and do not pay what you owe, the IRS may add penalties and interest to your tax bill. Understanding where these penalties come from can help you better understand your tax bill and encourage you to be proactive about your tax situation.

Failure to File

The failure to file penalty is assessed when a taxpayer owes taxes but does not file. If you don’t owe taxes and are owed a refund, there is no penalty—although are essentially giving your own hard-earned money to the IRS. This penalty is based on how late your return is and how much you owe. 

The penalty is currently 5% of the unpaid taxes for each month (or portion of a month) that your tax return is late. Although this amount grows each month that you fail to file, it does max out at 25% of your unpaid taxes.

Failure to Pay

The failure to pay penalty is considerably smaller than the failure to file penalty, highlighting the need to file even if you are unable to pay. The penalty is currently 0.5% of the total unpaid taxes for each month they remain unpaid. As is the case with the failure to file penalty, the total penalty will not be higher than 25% of your unpaid taxes.

You may be able to reduce your penalty by filing your tax return on time and requesting an installment agreement. When you have an approved installment agreement, the penalty drops to 0.25% per month.

Your penalty may increase if you fail to take steps to address your tax bill. If the IRS sends you a notice of intent to levy and you do not pay within 10 days, the penalty increases to 1% per month.

What Happens When You Owe Both Penalties?

If the IRS charges you both a failure to file penalty and a failure to pay penalty, they do mitigate some of your losses. When you owe both for the same month, the failure to file penalty is decreased by the amount of the month’s failure to pay penalty. In total, there’s a 5% combined penalty.

IRS Enforcement Actions

Being proactive isn’t just good for your peace of mind; it can also prevent the IRS from taking more aggressive collection actions. These actions are much harder to stop once the IRS has already initiated them, so it’s in your best interests to figure out an alternative payment option. If you have unpaid taxes, you may face the following consequences:

  • Liens – When the IRS places a federal tax lien on your property, they place a legal claim against your property for the amount that you owe. They may place liens on real estate, personal property, and other assets. The IRS also notifies your creditors that they have placed a lien on your property, which can make it much harder for you to get credit.
  • Levies – A levy allows the IRS to seize your property in order to clear your tax debt. The IRS may garnish your wages, seize funds from your bank account, or seize your assets and sell them off. This includes vehicles, real estate, and other personal property. Note that the IRS does send out multiple notices before resorting to this option.

Legal Consequences—The Differences Between Negligence and Criminal Activity

In the vast majority of cases, someone who does not pay their taxes simply does so because they are either unaware of their obligations or they truly do not have the funds. There are situations, though, in which failure to pay taxes becomes a criminal matter.

When a taxpayer engages in tax evasion or fraud to avoid paying the taxes they owe, that is no longer a civil matter—it is a criminal matter. The IRS realizes that people fall behind financially and are genuinely unable to pay their taxes. However, tax evasion involves those who intentionally defraud the IRS in order to avoid paying the taxes they rightfully owe.

For example, someone who claims deductions or credits they are not entitled to, hides assets or sources of income overseas to avoid paying taxes on them, hides sources of income, or otherwise intentionally lies about their financial situation could be accused of tax fraud and evasion.

This is not something to take lightly. The financial penalties are incredibly costly, and on top of that, you could go to jail for not paying your taxes. It is fairly rare for the IRS to bring criminal charges against a taxpayer, and they generally do so when a taxpayer egregiously defrauds the IRS. They are not interested in the time and expense of court for an unintentional mistake or error.

How to Resolve Unpaid Taxes

Knowing that you should file your taxes even if you are unable to pay, you may wonder how you can address your tax bill if you cannot pay in full. There are several options you may explore, depending on your financial circumstances.

Installment Agreement

An installment agreement is one of the most popular options for taxpayers struggling to pay their tax bill in full. The IRS offers short-term and long-term payment plans. Short-term options last up to 180 days, and long-term options last up to 72 months. Your payment amount depends on your income, assets, and the amount due. There are benefits associated with having payments automatically withdrawn instead of making them manually each month. If you go this route, it’s important to ensure that you can genuinely afford the monthly payment amount—missing even a single payment can render the agreement null and void.

Offer in Compromise

An Offer in Compromise is a viable option for taxpayers who cannot pay their taxes in full but can pay part of what they owe. The IRS has stringent requirements for this program, so don’t assume that you can offer a small fraction of what you owe and have your offer accepted. It’s important to work with an experienced tax attorney to draft the strongest offer you can and move forward from there.

Currently Not Collectible Status

What if you truly cannot pay anything toward your tax debt? In that case, you may want to find out if you qualify for CNC status. Those who are considered currently not collectible have no income or no income left after IRS allowable expenses have been accounted for and no assets that can be used to pay off their tax debt. If you expect your financial status to change in the future, requesting CNC status may give you time to get back on your feet and prepare to resume payments.

Best Practices for Staying in Compliance

Once you get your tax situation sorted out and avoid failure to pay penalties, you’ll want to ensure that you have processes in place that help you avoid future tax problems. With a couple of tweaks to your financial routines throughout the year, you can stay compliant with IRS requirements.

Hire a Tax Professional

When you have a CPA or other tax filing professional you work with year every year, they get a good understanding of your tax needs and what types of records you should be keeping. This makes it much easier to keep the appropriate receipts and address any issues before they snowball. If there are concerns about withholding numbers that may leave you with a massive tax bill or deductions you’re counting on but don’t qualify for, your accountant can catch those problems right away and help you avoid more financial damage.

Keep Thorough Records

If you check in on your finances on a monthly basis, it’s harder to be blindsided by a huge tax bill when tax season rolls around. Regular financial checkups also allow you to track deductible transactions and otherwise save money on your taxes.

Check Your Withholding Numbers

For many people who end up with unexpected tax bills, their tax withholding is the issue. When the new year starts, double-check with your employer’s payroll office to verify that your withholding number makes sense for your family size and financial situation. 

If you are self-employed or do gig work, ensure that you are budgeting appropriately to make quarterly estimated tax payments. Making quarterly tax payments may also be a smart move if your income fluctuates significantly throughout the year and you’re unsure what you’re likely to owe.

Dealing with unpaid taxes can be incredibly stressful, especially once the penalties and interest start piling up. That’s why it’s important to tackle the situation as soon as it presents itself. When you work with the team at Seattle Legal Services PLLC, you can rest easy knowing that your case is in good hands. 

Our firm exclusively handles tax issues, so we have the experience and knowledge needed to help you find a solution. Call us at 206-536-3152 or fill out our online contact form to schedule a consultation now.