There’s no penalty for filing your taxes late if the IRS owes you money. But if you owe them money, things can get very ugly, very fast. Here’s what you need to know—and do—if you haven’t filed your taxes in years.
First, if you think you’re due a refund, your primary concern should be that you are leaving money on the table. But the chance to claim your share of that money doesn’t last forever—you only have a three-year window to collect what Uncle Sam owes you. Since there’s no penalty for filing a late return if you don't have to pay in, you’ll definitely want to do so immediately if you are owed money.
But let’s say you haven’t filed your taxes and you owe money. Or maybe you filed but haven’t paid what you owe. Either way, you could be in trouble with the IRS.
Technically, not paying your past-due taxes is considered a misdemeanor and you could be sent to prison for up to a year, according to Cornell Law School’s Legal Information Institute. That said, going to jail is unlikely, as David Cawley, a certified public accountant (CPA) and partner at Fraim, Cawley & Company, CPAS, explained to LendingTree:
If you commit tax fraud by either lying on your tax returns or not filing your returns altogether, you may be subject to criminal charges, but taxpayers will never go to jail for not having enough money to pay their taxes.
More commonly you’ll just have to pay penalties and interest on the taxes you owe—but the penalties for not filing are significant. The IRS charges a non-filing penalty of up to 5% per month on what you owe, up to a maximum of 25%. You also have to pay interest on any unpaid taxes after the filing deadline (check for the latest update on this IRS page for the current rate) along with a failure-to-pay penalty of 0.5% of your unpaid taxes for each month you don’t pay them, up to as much as 25%.
To break that down, there are two types of penalties at play. The "Failure to File" penalty will hit you for 5% of your total unpaid taxes for each month (or part of a month) that your tax return is late. On top of that, the "Failure to Pay" penalty is 0.5% of the unpaid taxes for each month (or part of a month) the tax remains unpaid. If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month or part of a month that your return was late, up to 25%. The IRS has a full description of their late filing fees and penalties here.
Once you miss your payment, the IRS will send you a letter. They’ll send you at least two billing notices before the collections process begins, and that is when things can get really ugly: The IRS can freeze your bank accounts, garnish your wages, and even put a lien on your house. While the government has up to six years to criminally charge you with failing to file, there’s no time limit on how long the IRS can go after you for unpaid taxes.
There are some circumstances in which the IRS might waive these penalties, although you’ll still have to pay what you owe. You need to prove “reasonable cause,” as outlined on the IRS website:
Making a good faith payment as soon as you can may help to establish that your initial failure to pay timely was due to reasonable cause and not willful neglect. If you’re billed for penalty charges and you have reasonable cause for abatement of the penalty, send your explanation along with the bill to your service center, or call us at 800-829-1040 for assistance. The IRS doesn’t generally abate interest charges and they continue to accrue until all assessed tax, penalties, and interest are fully paid.
The IRS offers a few “typical situations” where you may be able to claim:
Fire, casualty, natural disaster or other disturbances
Inability to obtain records
Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
Other reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so
In any of these scenarios, you’ll need to provide documentation (such as court records or a letter from a physician). Once you’re ready to file and pay, you’ll need to retroactively file returns for every year you’ve missed. If you have old pay stubs, 1099s, or W-2s, you’ll want to gather as much of that paperwork as you can. If you don’t have all of the information you need to file, you’ll have to provide your best guesses about your income, deductions, filing status, and so on. You might also be able to request a transcript from the IRS to get information from any W-2s or 1099s an employer filed on your behalf.
Once the returns for each year you’ve been delinquent are filed, pay off your back taxes and penalties. The IRS offers short-term (120 days or less) and long-term payment plans if you can’t pay it all at once. There are set fees for long-term payment plans, a summary of which can be found here.
If you can’t afford your back taxes and penalties, consider contacting the IRS to work out an installment plan. There’s also something called an “offer in compromise,” which is a request to consider accepting less than the full amount owed.
The potential penalties and stress from failing to file taxes will only get worse over time. Here are the steps you can take right now to fix the issue:
Gather your forms and income documents. Pull together all forms like W2s, 1099s, and payroll records from the years you haven't filed. You'll need to estimate your income if you don't have documentation.
Choose your filing method. You can file old returns manually through the mail, use IRS tax filing software, or work with a tax professional. A tax pro can help maximize deductions and handle communication with the IRS.
File your back returns in order. Start with the oldest unfiled return and work your way to the most recent. Ensure you use the forms and deduction rules applicable to each tax year. Mail each return separately once completed.
Pay any taxes owed. Calculate taxes owed on your unfiled returns or work with the IRS to set up a payment plan if you cannot pay in full. Interest and penalties will continue mounting until your balance is paid off.
Follow up on your filings. After filing, follow up in a few weeks to confirm the IRS received your returns. Respond promptly if they have any questions or request adjustments.
Stay on track going forward. Moving forward, be sure to start filing your annual tax returns again by the April deadline each year. Stay organized by keeping tax documents and records together throughout the year.
Consider amending past returns. Once compliant on unfiled taxes, you may want to consult a tax pro to see if amending prior year returns could recover refunds or reduce liabilities.
