7 million Americans fail to file their taxes each year, is this illegal? And if so, what are the consequences? Could delinquent taxpayers go to jail?

Is It Against the Law to Not File Taxes?

For a majority of taxpayers, tax season is not a pleasant time. With tax season comes uncertainty, paperwork, and stress. Though some people look forward to tax season as they get to receive a sizable tax return check, they represent a minority.

Filing tax returns every April 15th (though currently this date has been moved to July 15th due to COVID-19) is one of the most difficult financial obligations every wage earner in the US must go through. It’s no surprise then that about 7 million American taxpayers, or 5% of the taxpaying populace, fail to file their required income tax returns each year.

The natural follow-up question is this: Is it illegal not to file your taxes?

Failure to File Your Taxes Can be Considered a Crime

When faced with a bill they can’t afford, a taxpayer will usually not file their taxes out of fear. However, not filing one’s taxes is one of the worst things that a taxpayer can do if they owe back taxes.

Failure to file your taxes is considered by the federal government to be a crime. Refusal to file your taxes can be considered a type of tax evasion.

What then should you do if you don’t have enough money to pay your taxes? Wait until you have enough? The key is to file as soon as possible, even if you don’t have enough.

The Consequences of Not Filing Your Taxes

Though it is illegal to neglect your financial responsibilities, the IRS does not prosecute each delinquent taxpayer. This is because millions of taxpayers fail to file every year.

According to Fredrick Daily, our justice system doesn’t have enough jail space to put away even 1% of those who do not file their taxes. Nevertheless, the IRS calculated that the government loses $28 billion each year to delinquent taxpayers.

For those who have failed to pay their taxes, it is unlikely that you will go to prison. Still, the government cannot allow itself to lose billions each year. The IRS will use its vast collection power to retrieve its money.

Long-Term Consequences

In some cases, the IRS may not take immediate action against delinquent taxpayers. However, the IRS will eventually find your file in its labyrinthine of data. It will deploy its collection methods against you.

In the long-term, failure to file your taxes can result in limited loan access, seizure of assets, and/or even jail time. These various punishments are doled out by the IRS in the form of wage garnishments, tax liens, and levies.

Most Common Late Penalties

The most common occurrence, when taxes are unfiled or filed late, is a delayed tax refund. Even if you don’t receive any notices from the IRS initially, you will start to accrue penalties. So file your taxes on time.

Starting on April 16th, a late penalty of 5% (which caps at 25%) is taxed onto your owed amount for every month you fail to file. The IRS will then begin to send its CP515, CP516, CP518, and CP515B letters in sequence until you file.

To give you a metric of how intense the penalties can become, you can be fined up to $25,000 per year. Additionally, you can be sentenced to one year in prison for each year that you failed to file your taxes. Again, our justice system does not want to send every delinquent taxpayer to jail, but they will try very hard to get their money.

Filing for An Extension

If you do not file your taxes by April 15th (now July 15th) late penalties will start immediately the next day. Nonetheless, a highly viable option is to file for an extension. There is no shame in asking the IRS to give you some more time. They prefer if taxpayers choose to file for an extension rather than not pay their taxes at all.

An extension will extend your tax due date to October 15th. Nevertheless, you will need to give yourself an ample amount of time to file paperwork and get approval for the extension. An extension cannot be used as a last-minute solution, so plan accordingly.

When you file for an extension, consider this important information from the IRS:

  • An extension of time to file your return does not grant you any extension of time to pay your taxes.
  • You should estimate and pay any owed taxes by your regular deadline to help avoid possible penalties.
  • You must file your extension request no later than the regular due date of your return.

If you are interested in filing for an extension, or filing your taxes in general, but are unsure how to get started, contact one of our tax professionals.

Filing Your Taxes, But Being Unable to Pay Your Bills

If you did file your taxes but are unable to pay off your bills by the designated deadline, late penalties will still be applied to your balance, but they won’t be as severe if you had not filed at all.

The variable rate you could be charged on your principal amount for every month that goes unpaid is either 0.5% or 1% of your unpaid taxes. This is considerably better than a late penalty of 5% that grows to 25%.

The main takeaway is that you must file your taxes as early as possible. Be sure to file a few months in advance of the deadline. This will give you the necessary time to pay off your taxes, or to file for an extension.

As Daily reminds us in his book, Stand Up to the IRS, it is a crime not to file your taxes. But there is no criminal penalty if you file but can’t pay your taxes. You will owe interest and penalties, but you won’t be sent to jail.

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