You have a legal obligation to file your federal and state taxes each year they're due. If you don't, you could face steep penalties, including fines and criminal charges. Penalties aren't the only repercussions of failing to file, however. The IRS or the state of California could file a return on your behalf if they never receive one from you. While it may sound convenient to have the government take care of your return for you, the IRS doesn't take tax credits or deductions into account when filling out your return. You could be liable for a much heavier tax burden than you owe as a result.
A reliable California tax attorney can provide guidance and solutions when it comes to unfiled tax returns, ensuring you avoid unfair penalties or tax debts.
What Are the Penalties for Not Filing Your Taxes?
If you don't file a federal tax return, the IRS could resort to a number of penalties. Three of the most common (and most serious) are paying fees and accrued interest, issuing liens and levies, and bringing taxpayers up on criminal charges.
Paying Interest and Fees
The IRS will charge interest and late fees if you file a return late or pay your tax debt late. The failure-to-file penalty is 5% of the tax owed for each month it is late. The maximum you can pay for a failure-to-file penalty is 25%. The IRS will also charge a late fee if your return is over 60 days late. The fee is either $435 (for 2020) or 100% of the tax owed, whichever is lower.
Any unpaid tax accrues interest from the due date of the tax return until the payment is made in full. The IRS can also impose a failure-to-pay penalty, which you'll face if you file a return but don't pay your tax. The failure-to-pay penalty is one-half of a percent for each month the tax remains unpaid, up to 25%.
Liens and Levies
If you don't file and pay your tax debts, the IRS has the right to place a lien on your property. A lien protects the government's interest in your property, ensuring their tax debt is paid. The IRS can also levy, or seize, your property. You'll always receive notice from the IRS before a lien or levy takes effect. However, to avoid liens and levies, it's best to file and pay your taxes on time.
Criminal Charges
If you avoid filing your federal tax return long enough, the IRS might have reason to believe you've committed tax fraud. The agency will threaten to issue other penalties first, but the IRS could launch a criminal investigation if you ignore them. Tax fraud carries a sentence of up to five years in prison and a fine of $250,000.
California Penalties for Unfiled Taxes
The state of California can issue penalties on non-filers for state taxes. If you don't file a tax return, the Franchise Tax Board (FTB) can audit any previous return you've ever filed—no matter how old it is. For returns that you do file, the statute of limitations for audits is four years
The FTB's tax penalties and fees are similar to those of the IRS. For late tax returns and payments, the interest is 5% of the amount due for each month the tax goes unpaid, with the maximum penalty at 25%. If you're an individual and your tax balance is $540 or less, you'll pay either $135 or 100% of the amount due, whichever is less.
If your California state tax return remains unfiled, the FTB may send you a Demand for Tax Return Letter. If you still don't file after receiving the letter, you will owe 25% of the total tax amount. If you don't pay your taxes on time, the penalty is 5% of the unpaid tax plus one-half percent interest for each month it's not paid (up to 40 months).
Can the IRS File a Tax Return on Your Behalf?
If you neglect to file a tax return and don't respond to letters from the IRS reminding you to do so, the IRS may file a tax return on your behalf, called a Substitute for Return. The agency will fill out your tax return based on third-party information such as 1099 forms or W9 forms. Since the IRS relies on previous records of you and third parties, the agency may not have the most updated and accurate information. They may not file the return correctly, based on your current situation.
The IRS also doesn't take tax credits and deductions you may be eligible for into account when creating your tax return. As a result, you could end up with a higher tax bill than you actually owe. To avoid this situation, you should aim to file your return and pay your taxes on time. If you haven't filed for some reason, and you need help dealing with the IRS, a reliable tax professional can step in.
California Filing Taxes on Your Behalf
The state of California will also file a return for you if you fail to file one yourself. Like many states that collect income tax, California has a Substitute for Return (SFR) assessment process. If you don't file a return, the FTB will file one for you by assessing your average income. The FTB uses occupational licenses—for real estate, attorneys, etc.—to determine the average income for an occupation. If the FTB doesn't have sufficient income documents for you, they're allowed to assess your taxable income based on the average for your occupation.
A California Tax Attorney Can Help
If you haven't filed your tax return, either for the current year or previous years, it could lead to serious financial consequences. Dealing with the IRS or the FTB can be overwhelming if you aren't aware of all the possible fees, penalties, or charges. An experienced tax attorney can help you sort through your unfiled taxes and let you know what your rights are. Contact a California Tax Attorney today to set up a consultation.