Tax filing can be a source of controversy and frustration.
But as citizens of the United States, we’ve all agreed to abide by certain laws, and paying taxes is one of them. While it may not be the most enjoyable aspect of our civic duties, it is a necessary one to ensure our government continues functioning.
But what if we decide we don’t want to pay taxes?
We’ll say it right now— it’s not pretty. Let’s break down what happens if you don’t file taxes, and equip you with the tools and empowerment to find help when you feel like giving up!
Understanding Tax Obligations
The 16th Amendment states that Congress has the right to levy taxes on income from American citizens. As a small business owner— or simply a taxpayer— in America, you’re agreeing to these laws in exchange for living and doing business in the county.
What Do Taxes Pay For?
State Taxes— These are income taxes based on the state that you live in, with regulations and distributions varying between different states. Generally, state taxes pay for local programs and expenses like the fire department, public schools, new roads, landscaping, and parks and recreation.
Federal Taxes— These are taxes that are paid for the country as a whole; it encompasses things like Medicare, Social Security, and the military. Specific federal tax designations can get complicated because they’re changed regularly and allocated according to new programs appointed by the president, Secretary of Treasury, and other members of the executive and legislative branches.
Consequences for Not Filing Taxes
Although paying income tax isn’t the most fun part of owning a business, most American citizens are required to pay taxes (unless they fall in an extremely low-income range). If you don’t pay taxes when you should, well, get ready for a few uncomfortable realities.
1. Interest and Fee Penalties
April 15th is the general deadline for taxpayers to file each year. The Internal Revenue Service (IRS) checks taxpayers for how accurately they file, and if they see you didn’t pay enough, they’ll send you a bill and sometimes tack on a late fee.
If you don’t pay at all, you’ll receive a failure-to-pay penalty from the IRS, which calculates to 0.5% up to a maximum of 25% of your full unpaid tax bill. If you haven’t paid your full taxes 10 days after their notice, the fine increases to 1%.
You’ll also accrue interest on unpaid taxes from the due date until you’ve paid in full at a rate of 3%. So not only will you have to pay back your taxes with a fee, you’ll have to pay interest, too! The IRS Newsroom will give you a more up-to-date view of the fees and interest, but to stay as safe as possible, it’s best to pay your taxes.
2. Possible Criminal Charges
There’s a difference between making an honest mistake on your tax returns and intentionally trying to trick the system. There are three main ways you can endure possible criminal charges if you don’t file your taxes (or if you try to manipulate the tax system):
- Tax Fraud: This is when someone carries out a tax violation “willfully,” or intentionally avoiding it, even though they know they should. You’ve probably seen large corporations and multi-millionaires accused of this on the news, but lesser-known business owners, like this owner of a concrete company in Queens, do it, too.
- Tax Evasion: Consider this a smaller facet of tax fraud, like when this bagel shop owner in Fishkill, NY was accused of both tax evasion and wire fraud.
- Failure to File: This is the least intense and is considered an unintentional tax error. The government will recognize that you made an honest mistake, and while you might still have to pay fees, you won’t get charged with a criminal offense.
Specific fees and criminal charges can vary, but for tax fraud and tax evasion, some of the worst outcomes could be getting fined $100,000 or imprisoned. The failure to file a fine is congruent with any late payments or interest in filing your taxes late.
3. The Risk of an Audit
If the government sense you’re writing off too many business expenses, are rounding write-offs up, or are claiming so many charitable donations that it’d be impossible to still be in business, they could very well audit you to see what’s going on.
Auditing can be a total headache, even for those who aren’t intentionally filing wrong. If the government does find a reason for their suspicions, then you could get wrapped up in late fees and interest or criminal charges even faster.
4. Loss of Benefits
When the IRS finds that you owe the government money, they’ll use the tax refunds and credits you’d normally receive to pay themselves back instead. Think about it: if you don’t file taxes, you can’t expect to get a tax refund, because you didn’t report anything in the first place!
5. Long-Term Financial Implications
The IRS can control your credit, especially if they haven’t received the money you owe. If you haven’t paid your taxes and the IRS finds out, your credit score can reflect your debt to them. Plus, if you ever wanted to take out a housing or student loan, your tax debt records will still be on file and will make you a lot less likely to be qualified to borrow.
How to Avoid Facing These Consequences
- Understand why you have to pay taxes. Many argue about where our taxes go and why we have to pay so much, but until changes happen, taxes are a legal requirement for almost every American citizen.
- Track your income and spending throughout the year. The more you’re able to track what you make, the easier it’ll be to report in the spring.
- Find a tax professional you love to help you do your taxes. You don’t need to do taxes alone. Find a professional in your area or online who can help. Even if you are struggling to pay back your taxes, they can help you figure out the best approach.
Get a Tax Pro in Your Corner
You don’t have to be the only one managing your taxes, especially with a complex business structure. doola’s bookkeeping services help you manage your money throughout the year, and doola’s tax package can help you file successfully, accurately, and on time every spring.
How many years can you go without filing taxes?
The IRS can find out about intentional tax fraud or evasion as early as when you first file, which is why it’s important to never be late and always report accurately.
Is it mandatory to file a tax return?
For most of the country, filing your taxes is mandatory, exempting very low-income individuals.
Can you leave the US to avoid taxes?
No— tax consequences can follow you wherever you are.
Can I skip a year filing taxes?
No; you’ll receive a failure to file— or something worse— and have to pay interest and fees.