Ever Wondered What Happens If You Don’t a File Federal Tax Return?

Happy Tax Day! That’s right it’s April 15th, and hopefully you’ve already put last year’s tax return to bed. If not, you still have a few hours left to file your return or an extension (here’s a link to TurboTax Free Edition for those who really need it!) But just in case you’re considering trying to dodge filing a tax return (or paying Uncle Sam), here a few reasons to think again.

GoodFinancialCents has one of the best descriptions of what happens if you don’t file a tax return. To sum it all up, if you don’t file a federal tax return, you’ll end up owing the government a lot more in penalties and interest. Of course, if you’re caught intentionally evading taxes or defrauding the IRS, you could also get jail time.

Most late filers or payers, however, will face:

• Interest. The IRS charges interest on any amount of unpaid taxes you owe whether you’ve filed a return or not. The interest rate is the federal short-term rate plus three percent, compounded daily.
• Penalties. In addition to the interest that you’ll owe for every month you don’t pay, penalties accrue on any amount you owe the IRS at a rate of 5% per month (or partial month) past the deadline that you don’t file (up to a 25% maximum). That’s 5% interest per month! If the penalty weren’t capped at 25% and the interest were compounded, that would be the equivalent of an 80% annual interest rate. Ouch! If you file but don’t pay up, interest accrues at the much lower rate of 0.5% per month (or partial month) that the bill goes unpaid (equivalent to about a 6.17% annual rate). The lesson? File your return even if you can’t pay the taxes you owe right away.

If you have been skipping out on paying taxes (or filing tax returns) for an extended period of time, you have to assume the IRS will find you eventually. In that case, it’s far better to suck it up and approach them before they find you. Doing so will help you avoid criminal prosecution and may dramatically reduce any amounts you owe.