The Internal Revenue Service (IRS) requires all taxpayers with income in excess of the standard deduction and exemption amount to file a tax return by its due date. There are also special situations which require the filing of a return including self-employment income greater than $400 or church income over $108.28. Failure to file a tax return has adverse consequences even if owed a refund. Regardless of a taxpayer’s individual situation, the timely filing of a tax return will ensure unnecessary expenses are avoided.
Taxpayers who have an outstanding tax liability and fail to file a tax return by its due date are charged a five percent penalty per month for a maximum of five months. If failure to file the return was done willfully with the intent to defraud the IRS, the penalty increases to 15 percent per month for a maximum of five months or 75 percent. However, if a taxpayer can show reasonable cause for not filing a tax return, the penalties may be waived.
The IRS will impose interest charges on the outstanding tax balance for a tax return not filed. The interest rate charged is the sum of the variable federal short-term rate plus three percentage points. Interest will accrue each month on any unpaid tax balances and will not cease to accrue until the tax liability is paid in full. Furthermore, interest will also accrue concurrently on the unpaid tax penalties that are imposed for not filing a tax return.
Statute of Limitations
Federal tax law requires the IRS to assess tax within three years of the date the tax return was filed. If a tax return is never filed, the IRS will have an unlimited amount of time to perform an audit and collect tax from you. Filing a return, even if riddled with errors provides taxpayers some protection from being audited more than three years after filing. However, statute of limitation protection is not available if an inaccurate tax return includes items that are fictitious with the intent to evade taxes.
Loss of Refund
Taxpayers can submit a refund claim for the overpayment of tax within three years of filing the tax return or two years from the time the tax was paid, whichever is later. If you are due a refund but do not file a tax return, you will have a limited amount of time to file the return and collect a refund from the IRS. Evidence of reasonable cause will not be entertained by the IRS except for very limited circumstances, such as long-term mental and physical impairments and delays caused by natural disasters.
IRS Calculates Tax
If you do not file a tax return, you run the risk of having the IRS calculate the tax for you based on income information reported by third parties such as is captured on your W-2 and 1099 forms. When the IRS calculates the tax, it will not include all of the deductions you may be entitled to, which can result in a much higher tax liability. Once the tax is calculated, the IRS will begin collection procedures that can include wage garnishment and property liens.
- IRS Notice 746: Information about Your Notice, Penalty and Interest
- Cornell University Law School: U.S. Code § 6651. Failure to file tax return or to pay tax
- Cornell University Law School: U.S. Code § 6621. Determination of rate of interest
- Cornell University Law School: U.S. Code § 6501. Limitations on assessment and collection
- Department of the Treasury: Publication 556 Examination of Returns, Appeal Rights, and Claims for Refund
Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.