Not filing a tax return when you truly owe taxes is far worse than filing a tax return and not being able to pay the tax amount owed. If you file a tax return but cannot pay, the IRS has tax solutions to help you pay the tax amount owed. If you do not file a tax return it is considered a crime and you can be punished for it. So even if you do not have a penny to your name, it is still a great idea to file the return. Not filing a tax return can result in fine up to a $25,000 and a 1 year prison sentence for each unfiled tax year. Typically, the IRS won't send people to jail for unfiled returns because if they actually sent every person to jail that had an unfiled return, they would only be able to fit about 1% of those people in the jails.
The IRS may impose a "failure to file" penalty. If you owe money, a delay may result in a penalty as well as interest charges. Generally speaking, the longer you wait to file your return the more money you are going to be charged in penalties. Believe it or not, your bill could increase by as much as 25 percent if you continue to delay.
There is nothing worse than losing your tax refund to the IRS, but this is a very real possibility if you do not file a final return. If you are due a refund you will not be penalized by the IRS if you do not file. That being said, you cannot receive a refund without filing a return. In most cases, you have three years to file a tax return and receive a refund. After that, the IRS is not entitled to pay you.
After the expiration of the refund statute the IRS is no longer obligated to send you a check. Also, it is important to note that the statute of limitations for the IRS to collect owed taxes does not start until a return is filed or the IRS does a Substitute for Return (SFR).
In the past you may have been able to get away with not filing. However the IRS continues to update their computer systems every year to increase the efficiency in order to collect as much money as they can. The computer systems are good enough now to find individuals who are hoping the IRS won’t realize they didn't file. The IRS inefficiency is shown by the slow response time to non-filers. Many non-filers think that they got away with not filing because they are not contacted within a year or two, but this is pretty normal, the time lag is usually about 1-2 years before they start making contact for the unfiled return. The penalties and interest will continue to accumulate during the time that the IRS determines you haven’t filed yet.
The IRS has a computer system named ”Information Returns Program” (IRP). The IRP matches W-2 wage statements and 1099 income reports from the payers (employers). They match this information against the tax returns that people file. When the computer fails to find a return to match with the 1099 report this will make the computer automatically start a Taxpayer Delinquency Investigation. The computer we begin submitting computer generated notices to your last known address and if no response is made then an IRS employee will begin trying to make contact.
The IRS will begin by contacting you in one of a few ways. Depending on how they contact you can tell you how serious the IRS is taking your case. You can either be targeted as a criminal non filer or a non-criminal non filer.
When you are not being considered a criminal non-filer, the IRS will contact you by letter or telephone requesting that you file unfiled returns within a 30 day period of their request. You may also be visited by an IRS agent that will request that you file the returns directly with him as soon as your can. The IRS can also file the returns for you, which they can legally do and they WILL NOT give you the benefit of the doubt on anything (deductions). If you are visited by a criminal investigator, the IRS has started up a criminal investigation for your unfiled taxes. This is not common and is likely to happen only if you did not report several hundred thousand dollars of income over a period of a few years. Next to recover the taxes once you file or they file for you, you could be levied or have properties or money seized (e.g. bank levy, wage levy, personal property levy etc.)