The IRS has many legal courses of action to take in order to collect outstanding tax debts. They have means to forcefully collect what’s owed to them as well as the ability to enforce non-financial penalties that may impede your daily life.
You might be wondering how the IRS can take collection action if you haven’t even filed a return. How do you they know what you owe? Well, the IRS can actually file a return for you called a “substitute return”. It will show only very basic income information and simple deductions. This substitute return will not reflect particular situations such as selling a house, business deductions, or that you’ve had any change in circumstances from the last filed year. The result is that the tax may be overstated, showing that you owe more than you really do.
You will have 90 days to dispute the amount of tax in U.S. Tax Court if you receive a substitute return notice from the IRS. Failing to do so will result in the IRS formally assessing the tax and taking collection action against you.
If you have unfiled tax returns and are feeling overwhelmed, contact us today for a free consult! We can help.
Financial Penalties of Unfiled Tax Returns
The IRS has the authority to take what’s owed to them. In every one of these situations, the IRS must first notify you of your debt and of their intent to collect. Once you receive an official notice from the IRS, you’ll be given time to contact the IRS or file a petition with the United States Tax Court to work out a payment arrangement (such as an installment plan or offer in compromise) or dispute the amount due. If this time period passes without action from you, the IRS can enforce collective action of outstanding tax debt in some of the following ways.
A Tax Lien
A lien is a legal right for a person or entity to take possession of property belonging to another person until a debt owed by that person is paid. A tax lien is when the IRS takes possession of property owned by a person with outstanding tax debt totaling $10,000 or more. If the IRS files a lien on your name, they would get the profit on the sale of property you own. This makes it so the IRS will get paid before you do. Additionally, liens may also prevent you from finishing financial transactions, such as home refinancing or getting a bank loan.
A Bank Levy
To simplify, a bank levy is when the IRS takes over your bank account(s). The IRS works with your bank to be able to draw funds directly from your account. If you have multiple accounts in the same bank, a levy would apply to all of them. Once the IRS has given your bank a Notice of Levy, the bank must hold your money for 21 days before releasing the money to the IRS. You will not have access to your money during this time, so any checks or debits drawn from this account would bounce
Another type of levy is wage garnishment. Wage garnishment is when the IRS takes a portion of money from each paycheck you receive. The IRS cannot take your entire paycheck. However, the amount that they can take is determined by them based off state regulations, your filing status, pay periods, and the number of dependents you claim. Wage garnishment could leave you with very little left over in each check.
Interest and Fees
If you did not file your taxes and subsequently owe the IRS, two separate fees may be applied: one for not filing and one for not paying on time. The failure-to-file penalty is 5% of your balance due for every month left unpaid. This fee can go up to a total of 25% of your unpaid taxes. If you file your tax return more than 60 days late, the minimum failure-to-file penalty will be 100% of your unpaid taxes or $205, whichever is smaller. The failure-to-pay penalty is 0.5% of your balance due each month. This penalty will not be more than 25% of your unpaid taxes. If you haven’t filed and haven’t paid, the 25% cap applies to both penalties together. Of course, on top of the amounts due, whether it’s taxes or penalties, there will be interest added to all amounts not paid.
Wondering if your tax debt can be forgiven? Read about it here.
Nonfinancial Penalties of Unfiled Tax Returns
In addition to the financial hooks the IRS can put out if you have unfiled tax returns, other consequences may occur. Some, like retirement benefits, aren’t even directly caused by IRS action.
International Travel and Passport Issuance
If you owe more than $51,000 in tax debt, including interest and penalties, the IRS has the right to revoke your passport. In this circumstance, a tax lien would already have been filed and a levy issued. However, the IRS cannot do this if you are in bankruptcy, in an installment payment arrangement, being considered for an offer in compromise, or involved in a few other types of communication with the IRS. You will be notified by the IRS of its intent to have the U.S. State Department revoke your passport. If the State Department chooses to take action, you will have 90 days to fix the issue with the IRS.
Generally speaking, the IRS won’t try to put you in jail unless you’ve committed fraud or felony tax evasion. The biggest differentiator here is your intent. Did you knowingly and willfully commit a crime? Intentionally falsify your taxable income or withholdings? If not, the IRS will work with you to settle your tax matter without criminal charges. Read more on the subject on IRS and jail time here.
If you have a professional license, the IRS can revoke it until you file your returns and pay the tax owed. And yes, the IRS can revoke or suspend your driver’s license. Some types of licenses the IRS may revoke or deny renewal of are teaching licenses, medical and nursing, legal, cosmetology, accounting, and even hunting or fishing licenses. The IRS will send what’s called a Certificate of Non-Compliance to the licensing authority in question. That authority then has no choice but to comply with the IRS and suspend or revoke your license. You will be notified of the license revocation by that authority.
This penalty isn’t directly enforced by the IRS, however, if you have unfiled tax returns, your retirement benefits could be affected. By not reporting your social security wages on your tax return, the Social Security Administration will not have the information it needs to be able to properly calculate the amount available to you to pay at retirement or in the event of disability. When it comes time to retire, you may be out a substantial amount of money depending on how delinquent you were in filing your returns.
Inability to Get a Loan
Again, this consequence isn’t directly enforced by the IRS, but having unfiled tax returns could prevent you from getting lending or government benefits. Often times banks or agencies require copies of your prior tax return filings. You may be denied if you don’t have anything to show. Also, if a tax lien is in place, this will appear on a credit search and a lender is likely to deny you a loan due to the outstanding tax debt.