Failing to file a federal income tax return for two consecutive years can result in a wave of penalties, interest, substitute tax returns and headaches. If the Internal Revenue Service discovers the failure to file before you address the problem, it will inform you by letter of its findings and explain the steps you can take to rectify the matter. If you do not take action accordingly, you might experience any of several possible consequences.
Loss of Refund
The IRS does not penalize taxpayers who fail to file a tax return when a federal tax refund is expected. If you are three years or more late with a return for which you expect a refund, however, you will forfeit the refund.
In most cases, the IRS generates a substitute tax return based on the information provided by your employer on Form W-2 or on other documentation of income, such as a Form 1099. The IRS-generated return, however, does not give you tax credits and deductions for which you might qualify, such as child tax credits, education credits or earned income credits. The IRS sends you the substitute tax return along with the bill for the balance due according to its calculations.
Penalties & Interest
Failure to file your taxes for two years severely impacts your pocketbook. Along with a substitute return, you may be hit with additional penalties and interest charges. The IRS charges a penalty for failure to file and a penalty for failure to pay. It also charges interest on all taxes not paid by the filing deadline and on the penalty fees owed.
File Prior Year Tax Returns
The IRS adjusts its substitute returns with information provided by the taxpayer. Complete a prior year tax return for the two years you failed to file. Submit this information to the IRS so it can adjust the amount you owe. You still must pay the penalties assessed, but your total tax burden will go down with your exemptions and deductions. The IRS provides prior year tax return forms on its website.
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