Filing taxes every year is a legal requirement for most people in the United States. However, some people try to avoid filing their taxes for various reasons. The big question is: If you don’t file your taxes, will the IRS catch you?
What are the filing requirements?
First, it’s important to understand the filing requirements. According to the IRS, you must file a tax return if your income meets the filing requirements for your filing status and age. Here are the filing requirements for the 2022 tax year:
| Filing Status | Gross Income | Required to File | |
|---|---|---|---|
| Single | Under 65: $12,950 | Over 65: $14,700 | |
| Married filing jointly | Both spouses under 65: $25,900 | One spouse 65 or older: $27,300 | Both spouses 65 or older: $28,700 |
| Married filing separately | Any age: $5 | Yes, if gross income is at least $5 | |
| Head of household | Under 65: $19,400 | Over 65: $21,150 |
So if your income exceeds the filing requirements for your status and age, you are legally required to file a tax return.
What happens if you don’t file?
If you are required to file taxes but do not do so, you could face various civil and criminal penalties from the IRS:
- Failure to file penalty: The IRS can charge a penalty of 5% of the unpaid tax required to be shown on the return for each month or part of a month the return is late, up to 25% of the unpaid tax. This penalty will apply even if you are due a refund.
- Failure to pay penalty: If you don’t pay the tax you owe by the due date, you’ll face a penalty of 0.5% of the unpaid tax, charged per month or part of a month. This penalty can add up to as much as 25% of the unpaid tax.
- Interest charges: In addition to penalties, you’ll be charged interest on any taxes owed. The interest rate is determined quarterly.
- Loss of refund: If you are owed a refund but do not file your return, you won’t get that tax refund.
- Wage garnishment: The IRS can contact your employer to have part of your wages garnished. This means your employer withholds money from each paycheck and sends it directly to the IRS to pay your tax balance.
- Bank or wage levy: The IRS can legally seize your bank accounts or property to satisfy your tax debt. A levy requires the bank or other third party to turn over the assets to the IRS.
- Criminal penalties: Willful failure to file a return, supply information or pay taxes can result in criminal fines of $25,000 to $100,000 and imprisonment for up to 1 year. Any attempt to evade or defeat paying taxes could result in even larger fines and imprisonment up to 5 years.
The bottom line is, the civil and criminal penalties for not filing your taxes or paying taxes owed can be quite severe. The IRS takes tax noncompliance very seriously.
How does the IRS know if you don’t file?
You may be wondering how the IRS would even know if you don’t file your taxes. After all, it’s not like you are sending them information or paperwork, right? Wrong. The IRS gets copies of all the tax forms you receive showing income, such as:
- W-2 forms from your employer
- 1099 forms reporting self-employment or contractor income
- 1099 forms reporting interest or dividends
- 1099 forms reporting income from the sale of assets
In addition, if you are self-employed, the IRS expects you to make quarterly estimated tax payments. If you stop making those payments, that’s a red flag you may not be filing.
The IRS also runs matching programs to look for discrepancies between what you report and what is being reported by employers, banks, or other parties. If the IRS is reporting that you earned $50,000 in income but you haven’t filed a return declaring that income, they will wonder why.
There are also whistleblowers who can report noncompliance. In exchange, whistleblowers can get rewards from the IRS. So someone you know could turn you in if they know you are not filing.
How long can you get away without filing?
Technically, there is no statute of limitations for tax fraud. So the IRS could file criminal charges against you for tax evasion even if you haven’t filed in over 10 years. However, for general failure to file or pay penalties, there is a 10-year statute of limitations.
That means the IRS generally must assess taxes, penalties, and interest within 10 years. But that timeframe only starts once you file a return. As long as you don’t file, the IRS has unlimited time to pursue you for taxes owed.
In most cases, if you haven’t filed in 2-3 years, the automated IRS systems will catch it and start assigning penalties. The IRS often reviews returns 3 years in arrears, so they are likely to inquire about unfiled returns after a few years of noncompliance. Don’t expect to evade filing forever without consequences.
Can the IRS file a return for you?
If you are required to file a return but don’t do so, the IRS can file a return on your behalf, using their own determination of your income and tax liability. This is called a substitute return.
The IRS typically creates a substitute return when they have received information returns like 1099s showing you received income but have no record of you filing a tax return for that year. The IRS can use this substitute return to start assessing penalties and collecting taxes.
Information included on a substitute return
A substitute return created by the IRS generally includes:
- Your name, address, Social Security Number
- Filing status – usually single or married filing separately
- Exemptions – one if single, two if married
- Taxable income the IRS believes you received based on information returns
- Standard deduction or zero deductions
- No personal exemptions
- Maximum tax rate applied
- No tax credits
As you can see, the IRS does not do you any favors when creating a substitute return. They don’t give you the benefit of itemized deductions or try to minimize your tax liability. It is done solely to assess tax so they can start collection activities.
What if you disagree with a substitute return?
If the IRS files a substitute return, they will send you a Notice of Deficiency detailing their proposed liability and give you 90 days to challenge it at US Tax Court. If you do not respond, the taxes, penalties, and interest calculated on the substitute return will be assessed.
If you disagree with the IRS’s tax calculation on the substitute return, you should immediately prepare and file a tax return on your own. This will allow you to report your income, deductions, credits, and other information accurately. You can then work with the IRS to have your actual return replace the substitute return.
When can the IRS seize assets if you don’t file?
To collect unpaid taxes, the IRS follows these general steps:
- Files a substitute return or assesses your liability based on information they have
- Sends a notice demanding payment with penalties and interest
- Issues a Final Notice of Intent to Levy
- Sends a Notice of Levy and collects the funds from your bank account or wages
There is usually a 30-90 day period before each step. However, if the IRS believes collecting the tax is at risk, they can skip steps and immediately issue a levy. This could happen if you are believed to be hiding assets or leaving the country.
In general, the soonest the IRS can levy your bank account or garnish wages for unfiled returns is around 6 months after filing a substitute return. However, failure to file for multiple years or evidence of fraud can make IRS take immediate enforced collection actions.
Can the IRS seize your home or business?
Yes, in some cases, the IRS can seize your assets if you owe substantial back taxes and penalties for failure to file returns. The IRS must seek approval from a federal judge to levy real property like your home or business.
The IRS will usually impose levies on easier to access liquid assets first, like bank accounts, wages, and vehicles. But if those sources are not sufficient to pay your tax debt, they can eventually seize real property.
Having unfiled tax returns will increase the likelihood of the IRS pursuing criminal charges and seizing assets rather than working with you on a repayment plan. It is best to consult with a tax professional to get into compliance before tax debt grows too large.
Will the IRS work with you if you voluntarily file late returns?
If you have failed to file taxes for one or more years, the best course of action is to voluntarily take steps to get compliant before the IRS catches you. Here are some tips:
- File all unfiled returns – File the most recent year first, then work backwards filing all missing returns. Ensure the tax information is complete and accurate.
- Pay as much as you can – Include any payment you can afford with your late returns to show good faith.
- Respond to IRS notices promptly – If you get an IRS notice about failure to file or penalties assessed, respond quickly.
- Request an installment plan – If you cannot pay the full tax debt right now, submit an installment payment plan request.
- Explore settlements – The IRS may settle tax debts for less than the full amount in some cases if there is doubt they can collect it all.
Taking the initiative to get in compliance can help avoid some penalties and make it more likely the IRS will work with you. The IRS prefers taxpayers voluntarily file late returns and pay over being forced to pursue collection actions.
Penalty relief options
The IRS understands there may be good reasons why you didn’t file returns, such as financial problems, family issues, or health problems. Two programs can help get penalty relief:
- First time penalty abatement – You may qualify to have failure to file, failure to pay, and accuracy penalties waived if you have a clean history for the prior 3 years.
- Reasonable cause – The IRS may accept reasonable cause and waive penalties if you can show you exercised ordinary care but couldn’t comply due to circumstances outside your control.
Talk to the IRS or a tax professional about the options. Be ready to provide documentation to support any claims of reasonable cause for failing to file.
Conclusion
The bottom line is that the IRS has sophisticated systems to catch people not filing returns. You may be able to avoid filing for a year or two, but it is almost certain the IRS computers will identify you eventually. And the penalties, interest, asset seizures, and criminal prosecution can be severe.
If you have unfiled returns, take action now to get compliant. Voluntarily enter the tax system, file all missing returns, pay what you can, and work out a payment plan. This gives you the best chance for reducing IRS penalties and keeping your assets protected. An experienced tax attorney can also defend you and negotiate with the IRS on your behalf. Don’t wait for the IRS to catch you – take control of the situation now.
