5 Scary Consequences of Failing to File Your Taxes

Tax Audit
Getty Images
By Jennifer Calonia

Some people say they work best under pressure and choose to procrastinate on important tasks like filing taxes. Then there are those who simply forget to file by the April 15 deadline -- or deliberately avoid doing so.

Everyone makes mistakes, especially when under the stress of gathering documentation, crunching numbers and lowering tax liabilities as much as legally possible. However, avoiding your annual tax return obligations can result in costly consequences that extend beyond your bank account.

1. Late penalties. Considering the importance of filing your tax return, it's fair to expect some degree of penalty for failing to file your taxes. If you are expecting an income tax refund, chances are you won't get the same level of scolding from the Internal Revenue Service that others who owe money can expect to receive.

However, if you fall among the people who owe the government money, it's time to shake a leg and get your tax return in as soon as possible.

The penalty for filing late takes effect immediately following the April 15 deadline and will typically equal 5 percent of the unpaid taxes you owe for every month you delay filing your return, up to a 25 percent cap.

A less hefty penalty of 0.5 to 1 percent of your unpaid taxes per month applies to taxpayers who file by the deadline, but owe taxes and don't pay up. Even if you can't afford your taxes now, it's best to at the very least file your tax return on time.

Those who both file late and fail to pay for the taxes they owe are charged a maximum penalty of 5 percent of their unpaid taxes for every month the bill is late.

2. Delayed reimbursement. With spring vacations around the corner, you'll likely want to keep all the money you can. %VIRTUAL-article-sponsoredlinks%Those who wait beyond the eleventh hour to file taxes and claim their refunds may not only get dinged with a late-filing penalty, but holding up refunds does an equal disservice.

Ever hear people preach about not giving Uncle Sam an "interest-free loan?" By failing to file your taxes, you're only prolonging this financial injustice against your wallet. Essentially, you're giving up the ability to save or invest that money at a higher return.

3. Forfeiture of tax refund. Just because you don't owe the IRS money doesn't mean you can keep your refund on hold indefinitely. When you're owed a reimbursement from the government, its in no rush to pay you back. In fact, Uncle Sam will give you three long years after the tax year for which you filed to claim your back tax refund.

After this generous window, however, the IRS will consider your unclaimed refund a generous "donation," and you'll be out of your rightful cash.

4. Substitute for return. Individuals who fail to submit their tax return by the deadline (or extension deadline, if applicable) aren't in the clear yet. In fact, the IRS will attempt to contact delinquent tax filers repeatedly and remind them to file their tax returns.

If their efforts fail, the IRS reserves the right to file a substitute for return on behalf of the filer. The form calculates the amount of taxes owed based on taxable income, plus any applicable penalties. Payments made to self-employed individuals are also used in SRF computations, as are dividends paid on investments.

But a substitute for return isn't necessarily conducted in filers' best interest. This course of action does not take into account tax credits and deductions that may reduce your taxable income, which means you may be overpaying on your taxes in the end.

If you receive a bill from the IRS indicating that it performed an SRF, you can still file your tax return to claim your deductions and expenses. The IRS usually will make the appropriate corrections.

5. Arrest. The consequences for ignoring an IRS bill can be a lot more dire than warning letters. After sending multiple correspondences regarding an unpaid tax bill, the IRS will send a representative to your residence or business to collect payment -- typically if you owe $25,000 or more.

Continuing to avoid this responsibility can result in automatic wage garnishments, asset seizures like your car and may even lead to arrest and jail time for tax evasion.

At the end of the day, you're better off filing your tax return late than never filing it -- or paying your taxes -- at all.

Jennifer Calonia writes for GoBankingRates.com, a source for online banking, the best CD rates, savings account rates, personal finance news and more.


More from U.S. News

9 PHOTOS
10 Federal Taxes You Might Not Realize You're Paying
See Gallery
5 Scary Consequences of Failing to File Your Taxes
An 11 percent FAET is charged on sales of rifles and shotguns.
This same act called for a tax that used to be 12.4 percent of the arrow shaft's value, but about 10 years ago, Congressman Paul Ryan got this tax simplified to a straight 39-cent-per-shaft excise tax. As taxes tend to do, that rate has increased and is currently 48 cents per shaft.
So gun hunters, bow hunters -- are we missing anyone? Never fear -- the feds don't let anglers off the hook. In 1984, a 10 percent excise tax on fishing tackle boxes was created by Congress, with the resulting revenue earmarked for fish conservation and research projects. Amazingly, this tax has decreased to 3 percent.
Some taxes were passed to help pay for President's Obama's plan to provide affordable health care. One is the 2.3 percent tax on medical devices.
A 10 percent tax on indoor tanning services is collected from the customer at time of purchase by the tanning salon.
The feds take a 12 percent levy on truck bodies. The good news is that this tax applies to semis, and not to family pickups. The bad news is that because most everything you buy arrives in stores by semi -- and because truck manufacturers pass this tax on to truck buyers, who in turn pass it on to shipping companies, who in turn pass it on to retailers, who in turn pass it on to consumers -- you pay a piece of this tax anyway.
A good example of confusing tax logic is the 24.3 cent per gallon tax on natural gas. Up until the end of last year, this tax was first imposed, then more than canceled out by a 50 cent per gallon tax credit on liquefied natural gas.
And finally, have you ever thought to yourself that airplane tickets are too expensive, and the rates the airlines advertise are too confusing? You can thank this tax for that. The feds charge a 7.5 percent excise tax on every plane ticket you buy, and they also charge fees on top of the tax. Each leg of a domestic plane flight carries a $4 federal fee. Each international arrival or departure costs $17.50. And since flying to Hawaii or Alaska is sort of domestic, but also kind of international, the feds split the difference and charge you an extra $8.70 for those. Over the past two years, these fees have risen 4.5 percent. Enjoy your flight.
HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

2017 Tax Reform Impact: What You Should Know

Congress has passed the largest piece of tax reform legislation in more than three decades. The bill will affect the taxes of most taxpayers, but one key point to keep in mind is that for most people, the bill won't affect your taxes for 2017 (the one you file in 2018).

Read More

Brought to you by TurboTax.com

Top 5 Reasons to File Your Taxes Early

Every April, many taxpayers wait until the last minute to file their federal income tax returns. Despite this tendency, there are many reasons to file your taxes early. If you will receive a refund, you may want to submit your return as quickly as possible. Additionally, there are benefits to filing early for those taxpayers who have a balance due.

Read More

Brought to you by TurboTax.com

Video: How to Calculate My Federal Adjusted Gross Income

Many taxpayers earn income from several different sources. In this video, you'll learn how to calculate your adjusted gross income, which will help you deduce how much tax you owe.

Read More

Brought to you by TurboTax.com

Video: Documents Needed to File Income Taxes

Wondering which documents are needed to file your taxes? This video will carefully outline the different forms that will help you complete your taxes.

Read More

Brought to you by TurboTax.com
Read Full Story