Failure to File a Tax Return: Penalties and Problems

Failure to file a tax return is a serious offense, and the Internal Revenue Service has established a system of penalties that are assessed to individuals who are required to file and fail to do so. If the individual is required to file and would owe taxes (i.e., his withheld income does not meet his tax liability), three separate financial penalties are added to the taxes due. It is important to note that, although there is no penalty for filing late if the individual is entitled to a refund, not filing at all could lead to paying the same penalties if the IRS files a substitute return. The IRS may also file criminal charges for tax evasion, though this is not a concern for the average taxpayer simply for missing the filing deadline.

Not Filing, Not Paying and Interest Penalties

The IRS penalizes for not filing a return and not paying taxes due independently. It also adds interest charges for each day that the individual has not fully paid his tax liability. The penalty for failing to file is 5 percent of the individual’s tax liability per month, up to a 25 percent maximum, calculated between the filing deadline and the time the return was actually filed.

The penalty for failure to pay is 0.5 percent for each month after the filing deadline that the tax liability is not paid in full. This penalty has no maximum. If both penalties apply in the same month, the failure-to-file penalty is reduced by the failure-to-pay penalty. Therefore, the total charge is 5 percent for that month: 4.5 percent for failure to file and 0.5 percent for failure to pay. Thus, regardless of whether the individual actually pays his taxes due, it is much more harmful not to file at all than it is to file and not pay.

Additionally, the IRS will assess an interest charge of 3 percent per year (as of Quarter 1 in 2011) of the tax liability for each day that the taxes are not paid in full.

Substitute Return

If an individual fails to file a tax return, the IRS may file a substitute return for him. This substitute return allows only for an exemption based on filing status (single or married filing separate), and no other deductions will be calculated. That is, the IRS will determine the highest possible tax liability for the individual and then demand that amount. The individual can avoid paying more taxes than he otherwise would by simply filing on time even if he does not pay the taxes immediately.

Remedies for an Inability to Pay

An individual who cannot pay his tax liability may have some options when dealing with the IRS. An installment agreement allows the individual to pay his taxes over several months in small installments to help ease the burden and make payment more affordable. The IRS may allow a temporary delay in which the taxpayer is not expected to pay if he is considered unable. The taxpayer’s ability to pay will remain under review, and the IRS may place a lien on the taxpayer’s assets for security. A last resort is the Offer in Compromise, in which the IRS decides to settle the taxpayer’s debt for less than the full balance, including penalties.