What will the IRS do if I’m Late Filing or Paying my Federal Income Taxes

What happens if you don’t file your tax return on time? The IRS once revealed a dirty truth about their April 15th deadline, according to newspaper columnist Cecil Adams. After an investigation he reported that an IRS spokesperson “candidly admits there’s no way they can go through all that paperwork ferreting out schnooks who filed their returns 15 minutes or even a couple of days late.” So the simplest answer is: nothing, as long as you don’t wait too long. But then the IRS starts fighting back.

At least, that’s what they’d have you believe. But reporters at Slate have conducted some additional investigations, and discovered another dirty secret. “Seven million Americans fail to file their taxes every year, and in 2008 the IRS examined only 158,000 such cases. That comes out to a roughly 2 percent chance of getting caught.”

Interestingly, the IRS’s web site lists this as one of their most frequently-asked questions: Will I Go To Jail? And the IRS provides a reassuring answer. “A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation.”

“The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake.”

It’s also worth remembering that you’re not even required to file a tax return at all if your income falls below certain levels. TurboTax supplies a handy chart, showing what those levels are for people with varying ages and filing statues. The table shows that it’s possible to earn up to $20,900 without having to file a tax return – if you’re married and filing jointly – though the IRS drops that allowed income to just $3,650 if you’re married by filing separately.  Everyone else can earn at least $9,350 before they’re required to file, so if they earned less than that and then missed the deadline for filing a tax return – nothing happens!

If you’ve missed the deadline for paying your taxes, the IRS charges you interest on the due amount, and they also tack on some additional penalties. First, if you file your taxes late, there’s an automatic penalty of five percent for the balance due in each month after the deadline, up to 25 percent of the amount due. (So if your return would’ve showed that you owed no taxes, then fortunately your penalty is… $0.) Otherwise, the IRS also tacks on a small “failure to pay” penalty (just half of one percent) every month for the tax amount due, and it can increase to 1% when the IRS finally issues their “demand for immediate payment.” But that “failure to pay” penalty gets subtracted from the “filing late” penalty (if both penalties have been assessed).

And then the IRS also charges interest on the owed amounts, which is based on the standard “federal short-term interest rate” plus an additional 3 percent, which compounds daily…

Then what happens? Let’s ask the IRS themselves. On their web site, they reveal that if you don’t even file your tax return, the IRS secretly creates a “substitute return” on your behalf.  They use information from other sources – for example, any tax documents prepared by your employer. But it won’t include extra exemptions, “and may overstate your real tax liability.” And once they’ve filed your substitute return, the IRS sets about collecting the money they feel you owe them. (The IRS even reveals their collecting tactics, which include “placing a levy on wages or bank accounts or filing a federal tax lien against your property.”)

So that’s what the IRS does if you miss the deadline for filing your taxes. But if you still file a return, after the deadline, what happens then? “The IRS will generally adjust your account to reflect the correct figures.” The IRS can also offer an installment agreement for spreading out the payment “when the situation warrants,” according to their web site. (A friend of mine owed over $4,000 in taxes, which the IRS let him pay down in monthly $69 installments.)  If your financial condition is truly awful, the IRS may also consider a “temporary delay of the collection process.”

If the IRS honestly doesn’t believe you can pay off the lump sum balance, or that it would create a dire hardship, they might accept what’s known as an “Offer in Compromise” – an alternate payment plan that’s proposed by the taxpayer, in some cases for less than the amount that’s owed. It costs $150 just to file for an OIC, which is applied to the taxes if the offer is accepted and returned “if the OIC is deemed not to be processable”.

But if the offer is rejected, the IRS will get back to you with their own idea of an alternate settlement…