What Happens When You Miss a Tax Year?

Audit Time Limit

The Internal Revenue Code includes a statute of limitations that protects taxpayers from an IRS audit after the passage of three years from the return’s filing date. However, this protection only extends to those taxpayers who actually file a tax return. When you fail to file a return, the three-year period never begins. Effectively, this means that the IRS can conduct an audit, assess the tax for you and begin enforcing collection procedures against your assets at any time, regardless of whether it’s one year after the original deadline or 20 years.

You must also keep in mind that the tax law provides a separate 10-year statute of limitations on the IRS’s ability to collect the tax you owe. However, this limitations period doesn’t begin until the time the IRS assesses your tax, which means that until the IRS conducts an audit and determines the tax you owe for a tax return you never file, the collection period never begins. This provides the IRS with more time to collect the tax from you. And in the event it does initiate collections, it will use whatever means is legally available. This may initially begin with a demand for payment, but if you fail to pay your tax, the IRS can place liens on all your personal property, garnish your employment wages and even freeze the funds you have available in bank accounts.

Failing to file a tax return comes with monetary consequences as well. Beginning with the first day your tax return and payment is late, penalties begin to accrue on your outstanding tax debt, regardless of when the IRS discovers it and takes action. The IRS will increase your tax debt by 5 percent per month for the first five months your return is late. This 5 percent includes a 4.5-percent monthly penalty for filing your return late and a one-half percent penalty for paying late. However, once the initial five months pass, your balance will continue to accrue the one-half percent penalty for approximately four years. Moreover, your tax debt will also increase concurrently for separate interest charges.

The only way to begin the limitations periods for IRS audits and collections and to minimize the accrual of tax penalties and interest is to file your prior year tax return and pay your tax. However, if you decide to file prior returns, it’s important that you use the tax form and instructions for the relevant tax year.