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The IRS has taken down Al Capone, Wesley Snipes, Martha Stewart and other big names in the past for tax fraud. The federal government takes taxes very seriously.

Not filing your tax returns is a serious offense. Although there won’t be a nationwide manhunt for late returns, you may still see some hefty fines and possibly jail time.

What Happens When You Don’t File Tax Returns?

The IRS requires you to file your tax returns by April 15th every year. Filing your tax returns isn’t the most exciting think in the world but it’s important. Many people either put it off until the very last minute or fail to file altogether. Not filing your tax return can have costly consequences. Here are some of the penalties you may face when you don’t file your tax returns:

1. Late Penalties

The penalty for failing to file your tax returns or filing late takes effect on April 16th. You’ll owe the government 5% of the unpaid taxes in penalties for every month that they remain unpaid. That penalty, however, caps at 25%.

If you file by April 15th but owe the government and fail to pay the debt by that time, then a lesser penalty will be levied upon you. You can get charged between 0.5% to 1% of the unpaid tax debt for every month that it remains unpaid. Remember, you are required to file by the April deadline each year. In some cases, you can get an extension to file your taxes, but you’ll need to go through the proper channels and paperwork to do this.

2. You Could End Up Forfeiting Your Tax Refund

The IRS gives you three years to claim your back tax refunds. If you keep missing or failing to file your taxes, you will have effectively forfeited those back-tax refunds after the third year. You’re basically losing out on free money that you could most likely use.

3. Your Refund Can Be Delayed

The government can take time investigating your taxes when you consistently file late. Furthermore, the fact that you delayed filing your taxes means that there will be penalties levied. This can lead to your tax refund being delayed or forfeited altogether depending on the fines.

Even though the 5% per month penalty takes effect on the 16th of April, the IRS will still send letters with codes such as CP515, CP516, CP518 and CP515B. If you fail to act on these notices and don’t file your taxes or pay what you owe the government, you can end up facing jail time.

The fine for failing to comply with IRS can reach as high as $25,000. The jail time can be as long as one year for every year that you failed to file your taxes.

What Should You Do When You Have Unfiled Tax Returns?

When you don’t file your taxes on time and fail to heed the warnings sent by IRS, they will prepare a substitute tax return on your behalf. They base the information they use on the information they already have including W-2 and 1099 forms.

The letter you get from the IRS will state the sources of income that the IRS used to calculate the substitute returns.

Once the letter is prepared and sent, the IRS gives you 30 days from the official date of the letter to do the following:

  • Send in a completed tax return
  • Send in a letter consenting to the assessment and collection form
  • Send the IRS a letter explaining the reason you couldn’t file your returns

If, however, you want to file your back taxes to avoid further penalties, here are the steps that you need to take:

1. Get the Information You Need to File Your Back Taxes

You can start by requesting that the IRS send you your W-2 and 1099 forms. If, however, you are self-employed then you need to gather all the documents showing any sources of income that may not be on file with the IRS.

2. File Your Tax Return

Be sure to complete the tax return form as accurately as possible. You can even enlist the help of a qualified tax preparer to ensure that you don’t miss anything. If you need more time to complete unfiled tax returns or pay the money you owe, you can contact the IRS to see if you can get an extension or agree to a payment arrangement. This can help you avoid further penalties.

3. Monitor Return Processing and Compliance

You need to ensure that you monitor the return processing by asking for your account transcript to ensure that the IRS got your returns and that you have adhered to everything.

The IRS requires you to achieve tax compliance by filing all unfiled back taxes. In some cases, you may need to go back as far as six years. However, every account is different, and you need to be in open communication with the IRS. This will help ensure that you have fully complied to avoid jail.

There is some good news. Depending on your circumstances and how open you are with the IRS, you may qualify for IRS Amnesty or Reasonable Cause. This means that your penalties, fines and payment are either reduced or waived.

No matter the case, the IRS investigates unfiled taxes. To avoid the penalties, do your best to adhere to tax compliance by filing your tax returns by the April 15th  deadline.

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