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What Happens if You Don't File Taxes for Three Years?

Every tax year, more than 7 million Americans miss the filing deadline. So if your business is among them, well—you’re in good company.

Over the past three years, there could be many reasons why you missed the annual federal income tax filing deadlines. The challenges of the pandemic were undoubtedly a big one. But here’s the good news: If you get caught up quickly, skipping a few years may not have a significant financial impact on your business, as opposed to five or 10 years of not filing. However, if you procrastinate too long, you could face far more severe consequences.

What’s the difference between not filing and not paying your taxes for three years?

The difference between late filing and late payment boils down to how much you’ll pay in fees. Your penalty amount will depend on the amount of taxes due and how late you file your taxes. Let’s take a closer look.

Penalties for not filing taxes

If you owe tax and fail to file on time, you’ll face a failure-to-file penalty. Every month your tax return is late, the standard penalty is 5% of the unpaid taxes. The IRS caps the fee at a maximum tax penalty of 25%, so the total doesn’t keep increasing. The minimum fine, which goes into effect if you file more than 60 days late, is $435 or 100% of the unpaid tax—whichever is less.

Read more: What’s the Penalty for Filing Taxes Late?

Penalties for not paying taxes

While this payment penalty is far less, you can still be on the hook for a significant amount. For each month you don’t pay your taxes, the IRS will charge you 0.5%, up to 25%, until you clear your tax bill. The IRS also charges interest for overdue taxes (equal to the federal short-term rate, plus 3%).

Read more: What To Do When You Can’t Pay Your Owed Taxes

After not filing for three years, here’s what happens

Even after three years, you could face more than fees if you ignore your taxes. In addition to the penalties mentioned above, the IRS can:

  • Set up a levy on your wages or bank account. The result can be a garnishment of wages and other income.

  • File a notice of a federal tax lien, which can limit your ability to take out loans or use your credit.

  • File a lien secured to your property, meaning they have a say in any sale of your property or assets and will take the tax payments you owe from the proceeds.

  • Charge you with tax evasion if you willfully avoid filing taxes. You could face fines up to $250,000, and even jail time in extreme cases.

  • Revoke your passport for tax debt over $50,000.

  • Seize your tax refund to repay debts that you owe.

You may also miss out on possible tax refunds by not filing. With the IRS reporting $1.5 billion in unclaimed tax refunds (the average refund is $813), you’re missing out on money due to you.

But remember, once three years are up from the due date of your income tax return, you can no longer claim a tax refund. You won’t receive credit for the refund on your account or be able to apply it to a future return either. However, in general, not paying your taxes for three years will be much easier to resolve than not paying for five or 10 years. Not only will it be much easier to get your bookkeeping back up to date, but you’ll also owe less in fees and back taxes.

Generally, a failure-to-file penalty usually costs ten times more than a failure-to-pay penalty. So if you know you won’t be able to pay the full amount you owe on your taxes, you should still always file as soon as possible.

You might be surprised by the options the IRS offers to help settle tax debt. You can apply online for a payment plan with the federal agency to pay off your debt in monthly payments. Some taxpayers may be eligible to settle their debt through an installment agreement or offer in compromise. You could also request a penalty abatement, which allows you to avoid penalties when you file or pay your income taxes late or make an error.

Getting your bookkeeping and tax records in order after three years

Obviously, keeping accurate books is the only way to ensure your tax records are current with the IRS. Our Bench Retro team can quickly complete your bookkeeping from prior years, even if you’ve got unclear or missing documents, and find every tax deduction, so you only pay the IRS what you actually owe.

We helped thousands of small businesses, like yours, navigate difficult times during COVID-19 with the Paycheck Protection Program (PPP) Loans Small Business Resource Hub. It offers information about the SBA’s Paycheck Protection Program loan, loan forgiveness, qualifications, applications, and more.

The bottom line

You’re not alone if your small business taxes are three years past due because of COVID-19 or other life events. Tax preparation doesn’t have to be overly stressful—as long as you have the right help.

The IRS offers many tax relief programs for small business owners who are behind on their taxes. If you owe a large amount, or if your returns are complex, it’s a good idea to consult a CPA or tax professional (like the ones at Bench) to find out what program is right for you. You can rely on our bookkeeping and tax pros to guide you through catching up with your back taxes, filling out your tax forms, and getting back into good standing with the IRS.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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