What the IRS Does When You Don't File a Tax Return for 10 Years

Failure to file a tax return for a period of 10 years can have severe consequences. The ultimate actions taken by the IRS depend on a variety of factors, including whether returns were filed showing tax due but unpaid, whether income tax was withheld from a person's pay, and whether a person was self-employed. If a person has not filed tax returns for the past ten years, it could lead to an IRS audit. In cases where substantial tax is due, it could escalate into a criminal investigation. The following sections detail the various steps and actions the IRS might take if you fail to file a tax return for a prolonged period.

Dealing with Unfiled Returns

According to the Income Tax Act, the provision exists for the issuance of notices for assessment or reassessment for income that might have been escaped or omitted in a filed return. Sections 143 and 148 specifically address the reassessment of escaped income. These provisions ensure that if a return shows tax due but not paid, the IRS can take appropriate measures.

When an individual fails to file a tax return and has a sufficient amount of taxable income, they are still liable to undergo penal proceedings, regardless of when the unfiled return occurred. The statute of limitations does not apply here, meaning you are always open to the IRS creating a return for you and billing you or going after you for criminal charges.

Real-Life Consequences

A real-life example illustrating the severity of failing to file tax returns over a long period is provided by a story of a friend who did not file from 1997 to 2005. Despite receiving notices from the IRS, she ignored them. When she attempted to refinance her home in 2006, she discovered a judge had already issued a lien on her property due to outstanding IRS bills. The IRS had filed returns for her for those years and placed her in collections. Surprisingly, she found that the amount of fines and penalties incurred were lower than what she would have paid if she had filed. She had her own business and might have been operating "off the books," but this highlights the significant financial and legal implications of failing to file.

Potential Scenarios and Outcomes

If You Don't File: The IRS will not sit silently while you ignore your tax obligations. They have the power to create their own 1040s for you and move to collections. In extreme cases, they can also pursue criminal charges. If you have a tax liability but have consistently avoided filing, the IRS will eventually get involved. By that time, the penalties and interest might have escalated significantly, making the cost of paying up much higher than if you had stayed on top of your filings.

Ignoring IRS Notices: If you ignore IRS notices, the situation can quickly worsen. Delinquent taxpayers face penalties, interest charges, and even potential criminal prosecution if they have large tax liabilities. The IRS has various strategies to ensure that taxes are paid, including liens, levies, and even criminal charges. However, being proactive about filing your returns and paying any owed taxes can avoid these dire outcomes.

Conclusion

Not filing tax returns for 10 years is not without its costs and potential legal ramifications. The IRS can impose penalties, create tax returns, and even criminally investigate your situation if substantial tax is due. It is crucial to file your tax returns on time each year to avoid these severe consequences.

Ultimately, the best advice is to be compliant and file all necessary tax returns. Staying in good standing with the IRS can save you a lot of stress and money in the long run. The potential for incarceration and paying fines outweigh any short-term gains of avoiding taxes. Make sure to educate yourself on your tax obligations and seek professional advice if needed.