Have you ever wondered what happens if you don’t file taxes?
Spoiler: Nothing good – even if you miss filing your tax return for just one year.
Keep reading as I explain the consequences.
What happens if you don’t file taxes?
Note: While most Rinkydoo Finance readers live in the United States, I’ve got to show my fellow Canadians some love, too! That’s why I’ll be referencing both the Internal Revenue Service and Canada Revenue Agency throughout this article. Just keep in mind that unless you’re a taxpayer in both countries, you’ll only have to deal with one agency.
At first, nothing may happen
You likely won’t raise any red flags immediately after failing to file a tax return for the first time. That’s in large part because there are valid reasons not to file within a given year.
For example, the Canada Revenue Agency (CRA) says you don’t have to file if you don’t owe taxes and aren’t claiming any government benefits. The American Internal Revenue Service (IRS) has similar rules.
This isn’t to say you shouldn’t file returns every year, mind you. In fact, many tax experts recommend filing returns even when you don’t technically have to. But the IRS or CRA probably won’t start asking questions for a while (however long it takes them to notice you haven’t filed and subsequently find evidence indicating you should be).
If you should be filing returns but aren’t, the government may eventually start doing so for you
Every year, employers, banks, investment brokerages, and other organizations submit paperwork to the government that can reveal what assets you own and how much money you earn. If you go long enough without filing, the government may eventually use these records to file returns on your behalf.
The problem? These returns might suggest you owe more (or are entitled to a lower refund) than in reality. The government may not take the time (or even have all of the required information) to assemble a fully accurate return.
Once they’ve slapped something together, though, the burden will be on you to prove its inaccuracy. That will be tough if you haven’t kept detailed records, as is common among people who don’t file taxes.
The government may send letters requesting (or demanding) that you file
Sometimes, rather than filing returns for you, the government will send letters requesting that you do so yourself. It’s not clear how they decide which approach to take. Either way, however, if the government knows you should be filing but aren’t, they’ll come knocking.
You’ll immediately begin accruing penalties and interest on any tax you owe
Once the IRS determines you owe money in relation to an unfiled tax return, this article states they’ll begin charging you a monthly failure-to-file penalty equaling 5% of any amounts owing, effective whatever date you should’ve filed by.
The IRS will also immediately begin assessing interest on your outstanding balance. The current annual rate is 3%. Unlike with the failure-to-file penalty, however, there’s no upper limit on interest. Your bill will keep growing until you pay it off or reach an agreement with the IRS (more on this shortly).
The CRA behaves similarly. Immediately after the filing deadline passes, they’ll start charging you a failure-to-file penalty. If you’re a first-time offender, your penalty will be 5% of your outstanding balance plus 1% for each month you don’t file, up to a maximum of 12 months. If you’re a repeat offender, the late filing penalty jumps to 10% of your outstanding balance plus 2% for each month you delay filing, up to a maximum of 20 months.
On top of those penalties, the CRA will charge you interest. The current annual rate is 5%. Your balance will grow until you pay it off in full or reach an agreement with the CRA.
If the government owes you a refund, you won’t receive it until you file your taxes
In both Canada and the United States, the vast majority of taxpayers receive refunds every year. If you’re in this category, you have no balance owing on which the government can assess penalties and interest for non-filing.
What the government can do, however, is withhold your tax refund until you file. Given the average tax refund equals thousands of dollars ($3,000 in the United States and $1,800 in Canada), you’d potentially be leaving lots of money on the table.
According to Farber Tax Law, Canadians may forfeit a tax refund entirely if they don’t file within 10 years of the relevant tax year. According to the IRS, Americans have just three years. So unless you enjoy giving the government money for no reason, file your returns, people!
Additionally, there are many income-based government benefits and credits you may not qualify for without a recent tax return. Again, that’s more money you’d be leaving on the table by not filing a tax return.
The government may begin seizing assets and garnishing your wages
In exceptional circumstances, the government may begin taking drastic measures to recoup outstanding balances it assesses if you habitually fail to file and pay your taxes. In both Canada and the United States, tax authorities can seize:
- properties
- vehicles
- personal belongings (i.e. jewelry)
- life insurance payouts
- investments and savings (including retirement accounts)
- government benefits and credits
According to H&R Block, the IRS will only go to these lengths if they suspect you’ve committed fraud or done something else malicious (i.e. deducted payroll taxes from your employees then kept it for your business).
You may face criminal charges
If you go long enough without filing and paying your taxes, things could get nasty. Both the IRS and CRA have the authority to conduct criminal investigations and recommend charges.
In the United States, tax evasion is a felony and can carry jail time plus a fine of up to $100,000, according to the Legal Information Institute. Canada has similar rules, with tax evaders being fined as much as 200% of their outstanding taxes and sentenced to as many as five years in prison, according to the CRA.
Afraid of filing your taxes? Here are some things to consider
If your reason for reading this article about what happens when you don’t file taxes is that you’re worried about your personal situation, here are some important points to consider.
Failing to file and pay is worse than simply failing to pay
As you should know by now, the government takes a very harsh stance against anyone who simultaneously fails to file and pay their taxes. They’re much softer on people who file their taxes and subsequently have a hard time paying the resulting bill.
In the latter scenario, both American and Canadian tax authorities would charge you a much lower interest rate. You may not even have to pay interest at all if there are sanctioned reasons (i.e. financial hardship or a death in your family) behind your inability to pay. Based on my research, they generally won’t seize your property or recommend criminal charges (punishments generally reserved for people who actively defraud the tax system).
My point? Always file your taxes – even if you’re not sure how you’ll pay the bill.
Fessing up to prior years of unfiled and unpaid taxes also generally yields softer penalties
The IRS has a voluntary disclosure program through which you can reduce any criminal liabilities and financial penalties for unfiled and unpaid taxes. The CRA has a similar program.
You should definitely consult tax and legal professionals before voluntarily disclosing wrongdoing (or assumed wrongdoing) to the government.
If you know you’re in the wrong, though, these programs are in place to spare you the harsher consequences that might arise if the government has to chase you for unfiled and unpaid taxes.
There are professionals who will sit in your corner
The tax system can be scary given how much authority it has to punish you. Thankfully, there are professional accountants and legal experts who will help you even in the worst of circumstances (i.e. you willingly having evaded filing and paying your taxes for several years).
If you receive a threatening letter from the government or would like to rectify years of non-filing on your own, contact one of these professionals for assistance. They deal with this stuff every day.
What happens if you don’t file taxes? Conclusion
I hope I’ve done a good job of explaining what happens if you don’t file taxes. To summarize, it definitely isn’t something you want to get in the habit of. Instead, work with a professional to submit a return (or determine whether you need to) each year.
Check out more of my articles on the topic of financial planning here.
