American taxpayers have until April 18 to submit their 2016 tax returns to the IRS. But if you don't file a tax return even though your filing status requires you to do so, then several bad things will happen.
First, you'll start accruing penalties. There are two separate penalties that the IRS can slap on your account: a failure-to-file penalty and a failure-to-pay penalty. The failure-to-pay penalty is 0.5% of the unpaid taxes per month, while the failure-to-file penalty is 5% of the unpaid taxes per month. Both penalties are capped at 25% of the unpaid taxes apiece. Clearly, it's in your best interest to file even if you can't pay: The failure-to-file penalty accrues much faster than the failure-to-pay penalty, and if you file your tax return but don't pay, then the penalty maxes out at 25% of the unpaid tax bill, rather than 50%.
Second, if you don't submit a tax return, the IRS has the right to make one for you. Naturally, the agency will include all income it can find for you, but it won't necessarily exert itself to claim every deduction and credit for which you're eligible. As a result, the tax return that the IRS generates for you will almost inevitably produce a higher tax bill than the one you would have filed yourself.
Third, if you never prepared a tax return for the year, then you might not realize that you were actually owed a refund. In that case, you won't have to pay a penalty for the year -- in fact, the IRS would be delighted if you never filed a tax return for that year, because it could then keep all the extra money you paid. After three years you lose your chance to claim this refund even if you do eventually file a tax return for that year.
Fourth, while not paying your taxes can get you in financial trouble, not filing your taxes is considered tax fraud and is a criminal offense. IRS criminal investigation agents are not going to crash through your door and drag you off to prison just because you failed to file a tax return, but they may launch a tax fraud investigation if they believe you owe a significant amount. And in extreme cases, yes, you could go to prison.
So what should you do after you fail to file?
The best thing you can do about a missed tax return is to file it immediately. File the return even if you can't pay those taxes right now; once you've filed the return you can start taking advantage of various IRS payment assistance programs, such as installment plans and offers in compromise. If you're fortunate enough to get a refund for one of those late tax returns, it can help balance out any taxes you owe for other missed returns (assuming you didn't miss the three-year deadline on claiming refunds).
If you're very late (i.e., several years behind) on filing a tax return, or you have multiple late returns to file, then get the help of an experienced tax advisor. Any taxes you owe for those years will be swollen by interest charges and penalties, so they'll be considerably higher than the initial charges, and you'll need professional help to deal with a tax problem that big. Look for someone who has experience dealing with IRS collections and appeals agents, not just auditors -- which means you'll need a good CPA or enrolled agent. Such a tax advisor can do two things for you: make sure you're claiming every possible tax advantage to minimize how much you owe for those years, and negotiate with IRS agents for you. An experienced CPA or EA will almost certainly get you a much better deal than you could get for yourself, making their fee an investment, rather than an expense.
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