For One Reason or Another...you didn't file this year. It could be because you forgot, or maybe something was financially keeping you from doing so. Or maybe you just didn't want to file because you thought you could beat the system. Unfortunately to the IRS, they don't really pay attention to why you didn't file. All they know is you didn't and you've just given them the green light to attack. Well it's important to know exactly what happens when you don't file.
It Starts With Penalties: As soon as the IRS finds out you haven't filed, they start slapping your debt with penalties. The Failure to File penalty is 5% of the debt per month, up to 25%. Chances are good that they will also hit you with a Failure to Pay penalty, which is 1% of the debt each month. There is no cap on the Failure to Pay penalty so the longer you wait, the higher it grows.
Don't Forget the Interest: As if you didn't have enough on your plate with penalties accruing, you've also got to think about the interest. The standard for interest 6% of the debt per year. However, interest is compounded daily on top of penalties so the annual interest rate is actually much higher than that. Keeping that in mind, if you owe $10,000 dollars, if a year goes by you'll owe $15,000 dollars; let 3 years go by and you'll owe about $35,000 dollars. And that's just from interest and penalties.
Jailhouse Rock: Not to mention, the IRS can legally send you to jail for not filing. You have to understand, the IRS is the largest collection agency in the world. They're going to get their money. You not filing, whatever the reason may be, tells the IRS that you don't care. That does nothing but make their blood boil and give them reason to take their actions to the fullest extent of the law. In this case, you'll be behind bars.
How to Stop It: The best way to avoid these situations is to file on time, every year. Even if you can't pay off an amount you might owe, you can certainly call the IRS and set up some form of payment. It's much better than letting the penalties and interest add up just because you didn't file.
Too Late? If your debt is already sky high because of penalties and interest and you know the reasons you didn't file was because of extenuating circumstances (death of a family member, illness of a family member, etc.) then you may qualify for penalty abatement. Speak to a reliable tax professional and see how you can get your issue resolved. Even if you can't get penalty abatement, you may qualify for something else that can put you in a much better spot than the one you are already in.
Now you have the Smoking Gun...Use It!
Labels: Penalty Abatement