What Happens If You Don't File Taxes for Five Years?

What do unexpected life events, running a busy company, and procrastinating have in common?

Any of these scenarios may cause you to miss the annual state and federal income tax filing deadlines. While skipping one or two years may not have a substantial financial effect on your business—as long as you get caught up quickly—five years of not filing or paying your taxes can result in greater impacts.

If you’re in this situation, we’ll walk you through what to expect from the IRS and how to get back into their good graces.

Filing deadlines by business entity

The first step to catching up on your taxes is knowing when they were due. Filing deadlines vary by your business entity type as follows:

Sole proprietors

Sole proprietors must include a Schedule C with their Form 1040 taxes, which are both due on April 15th of the following year. If April 15th falls on a Sunday or holiday, the date is moved to the next day. For 2022 taxes, the due date is Saturday, April 15th, 2023.

If you need an extension, you may file Form 4868 which will move your deadline to October 16, 2023.

Partnerships and S corporations

IRS Form 1065 for Partnerships is due on the 15th of March after the end of the partnership’s tax year. For 2022 taxes, the deadline is March 15th, 2023. Each partner’s Schedule K-1 is due on this date as well.

The deadline for S corporations to file 2022 taxes with Form 1120-S is March 15th, 2023.

If you need to file for a six-month extension, submit Form 7004 by March 15th to have your deadline moved to September 15th, 2023 for either entity.

C corporations

C corporation taxes are due April 15th of the following tax year. This makes the deadline to file your 2022 C corporation Form 1120 on April 15th, 2023. This is also the deadline to file for a six-month extension with Form 7004. This moves your deadline up to October 16th, 2023.

Estimated taxes

Sole proprietors, self-employed individuals, S corporation shareholders, and partnerships who pay over $1,000 in income taxes for the year are required to make estimated tax payments.

Corporations also pay quarterly estimated taxes if they are projected to owe more than $500 in the current tax year.

For the tax year 2022, quarterly payments were due on April 15th, 2022, and June 15th, 2022. The remaining payments are due September 15th, 2022, and January 15th, 2023.

Individuals may use Form 1040-ES to calculate their payments, while corporations use Form 1120-W. You can also use Bench’s free estimated tax calculator to find out what you owe.

Penalties for five years of nonpayment

Once you get to the five-year mark, you’ve almost certainly received a few strongly worded notices about your tax liability, with an explanation of penalties and possibly stronger consequences later on.

The first actions that you can expect are penalties and interest applied to your outstanding tax debt. The IRS computes penalties as follows:

  • For each month your return has not been filed, a 5% failure-to-file penalty is added to your tax debt.

  • Not paying your taxes adds another 0.5% monthly failure-to-pay penalty to the unpaid amount.

  • However, if both failure-to-pay AND failure-to-file penalties are applied, the IRS reduces the failure-to-file penalty to 4.5%. As a result, your combined penalty is 5% for each month you have not filed and paid your tax debt.

The good news is that the IRS caps the failure-to-pay penalty to not exceed 25% of your unpaid taxes. While this can still grow to a significant number, it does prevent your total tax burden from ballooning completely out of control.

How would these penalties be applied to your five-year-old tax debt? Here’s an example.

Let’s say you owe the IRS $10,000 after five years of not filing or paying taxes.

You’re charged both the 4.5% missed filing penalty and the 0.5% missed payment penalty on this amount. This is calculated as follows:

$10,000 x 4.5% = $450 per month in failure-to-file penalties

$10,000 x 0.5% = $50 per month in failure-to-pay penalties

Since the failure-to-pay penalty won’t ever exceed 25% of your unpaid taxes, this penalty total which could otherwise be $3,000 (60 months x 0.5%), is reduced to $2,500 ($10,000 x 25%).

However, the failure-to-file penalty is still added to your $10,000 balance at the rate of 4.5% per month, which is calculated as $450 x 60 months, or $27,000.

Your total penalties for five years on $10,000 of tax debt would then be $27,000 + $2,500 = $29,500.

Adding interest to the mix

The IRS also adds interest, compounded daily, on top of your penalties. The formulas used for interest calculation are as follows:

  • Corporate and non-corporate entities: Federal short-term interest rate plus 3 percentage points

  • C corporations with taxes exceeding $100,000: Federal short-term interest rate plus 5 percentage points

What if you’re due a tax refund?

Maybe for the past five years, you were due a tax refund, so you thought you didn’t need to bother filing.

This is a major misconception because even though you don’t owe anything, the IRS still requires you to file a return. In fact, if you were expecting a refund and haven’t filed in over three years, the IRS withholds your refund.

The good news about not filing when you have zero tax liability, is that you dodge the expensive 4.5% failure-to-file penalty.

If you don’t file, the IRS may do it for you

If the IRS has reason to believe you have earned income, but you haven’t filed a return, they will file a Substitute For Return, or SFR, on your behalf.

While it may sound like they’re doing you a favor, this is far from an ideal solution for your delinquent tax situation. To complete the SFR, the IRS bases your taxes on financials pulled from your bank account records, contractor payments, and other sources. They don’t include itemized or standard deductions, exemptions, or tax credits that would lower your tax liability. Then the IRS adds the penalties and accrued interest to your already inflated tax debt.

Before taking this action, the IRS sends you an assessment letter along with the SFR. If you fail to respond to this correspondence, the IRS will send a second letter by certified mail to notify you that they will begin the collection process based on the SFR amount.

It goes without saying that the sooner you communicate with the IRS, the better chances you have of avoiding a federal tax lien on your business, or worse, levies on your assets.

Where to begin in order to fix your delinquent tax situation

Now that you’re ready and willing to work with the IRS to make good on your back taxes, what happens next?

At this point, securing the services of a bookkeeper and a tax professional, such as a CPA, to help you catch up on your tax filings is your best option.

At Bench, our dedicated team of historical bookkeeping specialists will get your books updated quickly and efficiently. We’ll work with you to ensure your financials are accurate, so you can file your taxes and get back on track with the IRS.

What happens if you can’t afford the tax bill

What if after you’ve filed your returns, you can’t afford to pay your taxes?

Facing a large tax bill can be daunting, especially if you don’t have the funds to pay it off right away. Though five years is a long time to go without filing and paying your taxes, the IRS will work with you to arrive at an amicable solution to help pay off your tax debt.

The IRS may agree to one of the following solutions to help you pay your tax bill:

Installment plan

The IRS will work with you to create an affordable monthly payment plan to pay off your tax debt. You must provide information on your monthly expenses and earnings to be approved for any installment agreement. Additionally, the IRS will need all of your prior years’ tax returns before they consider this agreement (in other words, you’ll have to file your past due returns before you ask for an installment plan).

Offer in compromise

In certain cases, the IRS will compromise with you on a settlement for much less than you owe. In order to qualify, you’ll need to demonstrate financial hardship and show how paying off the full amount is untenable in your current financial situation. It’s worth exploring if you’re facing a large tax bill that you can’t afford, although it’s highly advisable to hire a tax attorney or tax resolution company to handle these negotiations on your behalf.

Request “Currently Not Collectible” status

If you can prove to the IRS that your current financial situation makes it impossible to pay anything towards your tax debt, they may temporarily grant you the currently not collectible, or CNC, status until you are able to make payment arrangements. However, penalties and interest will continue to accrue on the amount owed.

Penalty abatement

The IRS may agree to waive your penalties If you’re able to demonstrate that your failure to file and failure to pay are a result of a reasonable cause. The cause may be a natural disaster, death or serious illness affecting you or your immediate family, or your inability to access your records. You stand a better chance of the IRS approving penalty abatement if this is your first time in this situation.

How Bench can help

Up-to-date financial records are essential for preparing your tax return, but if you haven’t been keeping up with your bookkeeping, Bench can help. Our team of expert bookkeepers will work with you to track your income and expenses, so you can rest assured that your numbers are always accurate and up-to-date. You’ll be able to file your taxes on time and avoid penalties and accrued interest.

The bottom line

If you find yourself five years behind on your small business taxes, you’re not alone. But with the right help, catching up on your back tax obligations doesn’t have to be an overwhelming struggle.

Tax relief is available for small businesses in this situation, and the IRS has a number of programs designed to help taxpayers come into compliance. The best way to figure out what program will work best for you is to speak with an experienced tax professional. They can help you navigate the complex process of catching up on your back taxes and getting back into good standing with the IRS.

What's Bench?

We're an online bookkeeping service powered by real humans. Bench gives you a dedicated bookkeeper supported by a team of knowledgeable small business experts. We’re here to take the guesswork out of running your own business—for good. Your bookkeeping team imports bank statements, categorizes transactions, and prepares financial statements every month. Get started with a free month of bookkeeping.

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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