Most people only think about taxes briefly each year when they put together their annual income tax returns. Their employers handle the estimated withholding from their paychecks, and they may never think about their tax obligations after initially filling out their W-2 with the company.
Workers generally assume that they may receive a refund after filing their income tax return. Some taxpayers decide that the hassle and expense of putting together an income tax return is not worth the refund that they might receive at the end of the process. Some people forget to file income tax returns, and others make a conscious decision not to file a return.
In some cases, those who fail to file income tax returns may face penalties. What are the potential consequences of failing to file a return?
Taxpayers may be subject to penalties
The final amount of taxes due for the year and the payroll contributions the worker made determine whether they are at risk of a penalty or not. The Internal Revenue Service (IRS) does not assess any kind of penalty against those who fail to file a return when they are due a refund.
Individuals who don’t file their income tax returns after paying more than their share in taxes may lose out on the opportunity to receive a refund. However, the IRS cannot punish them beyond the loss of their refund.
In cases where a change in household circumstances or secondary streams of income result in an underpayment of taxes, the filer could be at risk of a significant penalty. The IRS can assess a penalty of 5% of the unpaid amount of taxes monthly, up to a maximum penalty of 25%. That penalty may continue accruing interest until the taxpayer pays what they owe in full.
Most of the time, filing an income tax return is a worthwhile undertaking solely for the peace of mind that it offers. Those who have failed to file income tax returns and who discover that they have underpaid their taxes may face financial penalties and other tax controversies.
Reviewing recent income tax returns and income records with a skilled legal team can help people respond to allegations that they have underpaid their taxes. Taxpayers who have assistance are less likely to make additional mistakes that could worsen their legal and financial circumstances.