Do You Need to Pay Taxes?
Your need to file a tax return depends on many factors, first of which is your filing status. For example, in 2009, if you're single and no one else can claim you as a dependent, you must file a return if your gross annual earnings are at least $8,950 if you're under the age of 65, and $10,300 or more if you're 65 or older. However, income criteria can change from year to year and may not be applicable to the year that you need to file. Because numerous factors come into play and each tax filer's situation is different, consult a tax attorney or the Taxpayer Advocate Service at 1-877-777-4778.
Nonfiling & the Statute of Limitations
Federal law imposes a statute of limitations with respect to the IRS's ability to collect unpaid taxes. According to Title 26, U.S.C., Section 6502, this is 10 years. However, many people who do not file returns mistakenly think that if they do not file a return, they no longer need to do so after 10 years pass. This is untrue. The statute of limitations applies to taxes that are assessed by the IRS. So once you file your returns and it is determined that you owe the federal government a certain amount, the IRS has 10 years after the actual filing, not the year for which it was filed, to collect the debt.
What Happens If I Don't File a Return?
If you do not file a tax return, the IRS will file one for you based on their estimation of your income. This is called a "substitute for return" or SFR. If the IRS files an SFR, they will typically list your status as single with no dependents. The IRS will not account for any legal deductions that you might have had you filed the return yourself, such as those for dependent children, medical expenses over a certain amount, or deductions for your business, if you have one.
What You Can Do
If the IRS files an SFR, you can then file an amended return with the appropriate deductions. However, if you still fail to file your own return, the IRS will take actions to collect the amount assessed. You will first receive a Notice and Demand for Payment, after which you have 10 days to pay the amount due or contest or appeal it. If you take no action, the IRS will then send you a second notice informing you of the method it will use to force you to pay a tax debt, such as wage garnishment, placing a lien or levy on your real and private property or garnishing the money in your bank account. You have another 30 days in which to appeal or request a hearing. If you take no action, the lien or levy will take place and there will be very little you can do after that point except pay the tax debt.
Not only are stringent penalties and interest applied to unpaid tax amounts, if the IRS determines that your knew you should have filed a return but failed to do so, you may face criminal sanctions. You can be fined up to $100,000 ($200,000 for corporations), receive a prison sentence of up to one year or both. These sanctions apply to each year you intentionally failed to file a return.
If your accountant, tax attorney or taxpayer advocate determines that you need to file a return for a given year or years, do so immediately. If you are in relatively good graces with the IRS and show no willful negligence, you may be able to pay the tax debt off in installment payments. The IRS website provides an Online Payment Agreement Application where you can determine your eligibility, as well as a service that permits your monthly payment to be automatically withdrawn from your bank account.