Failure to File a Tax Return: What Happens?
The Internal Revenue Service requires that anyone receiving income from any source must file a tax return each year, with limited exceptions. If an individual does not file an income tax return, the IRS will file one for them and then send that individual the bill of the taxes owed. At first, this sounds somewhat advantageous to have the service itself prepare and file taxes, but this process has its drawbacks.
The IRS prepared-filing is in no way a good substitute for a return a taxpayer prepares and sends personally. These “ghost returns” are based only on income and the IRS does not include any deductions or credits for which a taxpayer may qualify. The IRS files a substitute Form 1040 based on reports of wages paid by an employer and statements from financial institutions for interest and dividend payments made to the non-filing taxpayer.
Once the IRS calculates income, it will then calculate the amount of taxes due. It then adds interest and a penalty for not filing. The taxpayer is then sent a bill for payment of the amount of taxes, interest, and penalties.
The IRS does not immediately prepare a substitute return for a delinquent taxpayer. The IRS first sends several letters reminding the non-filer to file their return. Only after approximately one year of non-filing will the IRS file a substitute return for that individual.
With the availability of better technology, it has become much easier for the IRS to identify non-filers. The IRS now receives an increasing amount of electronic accounts reporting many different types of income. This allows the IRS to easily track those who are receiving income but are not filing a return.
It is very unusual for a taxpayer to have no offsetting expenses, deductions, or credits to be applied to taxable income or taxes due. It is only by personally filing a return that such offsets will be used to reduce taxes. Therefore, it is important for taxpayers to complete and submit their own return to avoid the IRS filing the substitute. Furthermore, if a substitute return is filed by the IRS, it is important not to ignore it. The taxpayer will need to work with the IRS to correct it in order to avoid collection efforts by the IRS to collect the amount of taxes due under that substitute return.
Issues involving taxes and failure to pay can be complicated and it is best to seek out advice from a tax law attorney if you suspect there may be problems with your taxes.