You create BIG problems when you have unfiled or delinquent tax returns (don’t submit your income tax returns with the IRS). It’s not hard to get behind on your taxes. Perhaps there was a death in the family or you suffered a serious illness.
Whatever the reason, once you haven’t filed for several years, it can be tempting to continue letting it go. However, not filing taxes for 10 years or more exposes you to steep penalties and a potential prison term.
There’s No Time Limit on the Collection of Taxes
If you have old, unfiled tax returns, it may be tempting to believe that the IRS or state tax agency has forgotten about you. However, you may still be on the hook 10 years later. If you don't file and owe taxes, the IRS has no time limit on collecting taxes, penalties and interest for each year you did not file. It’s only after you file your taxes that the IRS has a 10-year time limit to collect monies owed.
What If You Don’t File Voluntarily Substitute Return
If you fail to file, the IRS may file a substitute return for you. The Internal Revenue Service utilizes income that has been reported to them, like wages, interest income, subcontractor payments sale of property and so on. The IRS then presumes you are single, have no dependents, and makes use of the standard deduction. A Notice of Deficiency CP3219N (90-day letter) will be sent proposing a tax assessment.
You will have 90 days to file your past due tax return or file a petition in Tax Court. If no action is taken on your part, the IRS will proceed with a proposed assessment. If the IRS files a substitute return, it is still in your best interest to file your own tax return to take advantage of any exemptions, credits and deductions you are entitled to receive. The IRS will generally adjust your account to reflect the correct figures.
Collection and Enforcement Actions
The return the IRS prepares for you (proposed assessment) will lead to a tax bill, which, if unpaid, will trigger the collection process. This can include such actions as a levy on your wages or bank account or the filing of a notice of federal tax lien. If you repeatedly do not file, you could be subject to additional enforcement measures, such as additional penalties and/or criminal prosecution.
UNDERSTANDING UNFILED TAX RETURNS
A taxpayer who has unfiled tax returns is called a nonfiler. The act of not filing one’s tax returns is a crime. You can possibly face imprisonment for a length of time proportional to each year of unfiled tax return.
While the IRS does not put a bulk of taxpayers in jail or monetary fines ($25,000 for individuals and $100,000 for corporations) for failing to file tax returns, it is not a valid excuse to make this mistake.
Even if you have not received any notifications from the IRS, do note that they will catch up with you sooner or later.