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What Happens if you Don’t File your Taxes

  • Aditya 
  • 14 min read
what happens if you don't file your taxes

Filing taxes is an important responsibility that working adults must fulfil each year. Concerned authorities send reminders from time to time to pay income tax timely. However, some individuals choose not to file their taxes, leading to a series of consequences. In this article we will discuss what happens if you don’t file your taxes and the potential outcomes. Individuals should understand the repercussions of not paying income tax to comply with regulations and avoid financial difficulties.

What Happens if you Don’t File your Taxes?

Neglecting to file your taxes comes with significant repercussions, including penalties, financial setbacks, and potential legal consequences, such as imprisonment. It can also hinder you from accessing specific benefits. Therefore, it’s crucial to ensure timely submission of your tax returns each year to steer clear of any complications. You can consult resources from the Income Tax Department or seek assistance from a tax professional if you find yourself needing support with the tax filing process.

1. Penalty under Section 234F

Under Section 139 of the Income Tax Act, it’s crucial for employed individuals to understand that filing Income Tax Returns (ITR) annually within the specified due date (historically July 31) is mandatory. Failure to meet this deadline can result in a penalty of Rs. 5000 under Section 234F if the return is submitted after the due date. This penalty is reduced to Rs. 1000 if the total income for the year is under Rs. 5 lakhs.

2. Forfeiting Tax Returns

When you file an income tax return, you may be eligible for a refund based on your total income, deductions, and exemptions. Various sections of the IT Act offer deductions and exemptions that can reduce your tax liability. For example, you can claim a tax deduction of up to Rs. 1.5 lakhs per annum under Section 80C for investments. Failing to complete the tax filing process means missing out on claiming these deductions, resulting in financial loss.

3. Delayed Tax Filing Implications

taxes

The longer you delay filing your income tax return, the more time it takes to determine your tax liability for the financial year. The Income Tax department meticulously processes and checks each tax return, causing delays in receiving the tax refund.

4. Interest Charges

Delayed tax filing incurs a 1% interest charge per month under Section 234A. This can increase your tax liability, affecting your budget and future financial goals.

Also Read: How to Avoid Paying Taxes on a Used Car? Full Guide

5. Impact on Loan Eligibility

When applying for a loan, lenders assess your repayment capacity and financial well-being. Apart from income and other debts, your tax return is a crucial factor. Timely filing of ITR reflects financial discipline, portraying a positive image to lenders and increasing the likelihood of obtaining loans at reasonable interest rates.

6. Visa Application Challenges

Many countries require tax returns when issuing a visa. Failing to file returns on time can complicate visa acquisition, potentially affecting travel plans and professional growth, especially if you frequently travel for work.

7. Missed Opportunity for Tax Loss Harvesting

Delayed or failed tax filing eliminates the opportunity for tax loss harvesting, a strategy to offset investment gains with losses. Reporting all relevant gains and losses in your income tax return is necessary to benefit from this provision.

8. Legal Consequences

Technically, failing to file income tax returns could lead to imprisonment, ranging from six months to seven years under Section 276CC of the Income Tax Act. However, the Finance Act 2022 introduced an amendment, eliminating prosecution if an updated return is filed within the specified time under Section 139(8A) for AY 2022-23 (FY 2021-22), with the deadline being March 31, 2025.

Is it Mandatory to File ITR (Income Tax Returns)?

calculating tax

It’s crucial for every taxpayer to fulfill their responsibility by timely filing their income tax returns. Neglecting this obligation not only results in penalties but can also impact your eligibility for loans, visa approvals, and property transactions. In accordance with the Income Tax Act in India, the following entities are required to submit their ITRs:

  • Individuals with a gross total income exceeding Rs. 2.5 lakhs.
  • Senior citizens with a gross total income surpassing Rs. 3 lakhs.
  • Super senior citizens with a gross total income exceeding Rs. 5 lakhs.
  • Companies or firms, regardless of their returns.
  • Individuals seeking to claim a Share trading income tax or carry forward a loss under a specific income category.
  • Resident individuals with assets or financial interests abroad.
  • Residents and authorities holding foreign accounts.
  • Individuals earning income from assets or property associated with political parties, research associations, news agencies, educational institutions, hospitals, or trusts.
  • International companies conducting business in India.
  • Non-resident Indians earning over Rs. 2.5 lakhs in India.

Ensuring compliance with these filing requirements is not only a legal necessity but also facilitates various financial transactions and opportunities.

Also Read: How to Generate XML File for Income Tax Return? Complete Steps

What Happens if you Don’t File your Taxes but Don’t Owe Anything?

If you choose not to file a tax return because you anticipate no tax liability, you typically won’t incur penalties. However, it’s still advisable to submit your return as it is often a prerequisite for securing a mortgage, applying for educational financial aid, and seeking federal assistance.

There’s a possibility that the IRS might initiate a substitute for return if you neglect to file. In such cases, you might end up owing more in taxes than if you had filed yourself. This is because the IRS won’t account for any eligible tax deductions or credits you might qualify for. Hence, it’s prudent to consider filing, even if you don’t anticipate owing any taxes.

What Happens if you File Taxes Late?

tax

If you happened to miss the annual tax deadline, there’s still an opportunity to submit your return. However, if you’ve neglected to file for several years, the IRS typically requires you to catch up by filing six years’ worth of back tax returns to ensure you’re in good standing. Late filing poses risks beyond simply missing out on potential tax refunds, and here are three of them.

If you’ve got tax returns that haven’t been filed yet, it’s generally a good idea to get on that as soon as possible, especially if it’s required. There’s no specific time limit on unfiled returns, but it’s wise to do it quickly to keep penalties to a minimum. If you’re unsure whether you need to file for a specific tax year, you’ll need to figure out the income requirement for that particular year. You can check out Publication 17, also known as “Your Federal Income Tax,” for the relevant tax year to get the details.

1. Penalty for Failing to File

Failing to file your tax return promptly may result in the IRS imposing a penalty for failure to file. This penalty’s magnitude depends on the amount of unpaid taxes and how late the return is submitted.

The “unpaid taxes” refer to the tax balance indicated on your federal income tax return, minus any payments made during the year, such as through tax withholding. The penalty amounts to 5% of the unpaid taxes for each month or partial month the tax return is overdue. While the IRS caps the penalty at 25% of the unpaid tax amount, interest will be charged on the penalty.

2. Penalty for Failure to Pay

If you have filed a tax return but haven’t paid the reported tax by the due date or an approved extended due date, a failure-to-pay penalty comes into play. This penalty is calculated as a percentage of the unpaid taxes and equals 0.5% of your unpaid taxes for each month the balance remains unpaid.

Once again, the maximum penalty the IRS can levy is 25% of your unpaid taxes, and interest is applied to this penalty as well. If you’re subject to both a failure-to-file penalty and a failure-to-pay penalty in the same month, the IRS mitigates the amount owed. The combined penalty is set at 5% for each month or part of a month the return was delayed.

For instance, instead of imposing a 5% failure-to-file penalty for a month, the IRS would assess a 4.5% failure-to-file penalty and a 0.5% failure-to-pay penalty, totaling 5% of your unpaid taxes.

Also Read: Old vs New Tax Regime Calculator

3. Substitute Tax Return

In certain cases where you neglect to submit a tax return, the IRS may file a “substitute for return” on your behalf. The IRS utilizes third-party income information, such as W-2 and 1099 forms, to create the return. However, the agency won’t consider potential tax deductions and credits you may be eligible for.

If the IRS proceeds with a substitute for return on your behalf, you’ll have a 90-day window to submit any overdue returns or file a petition with the U.S. Tax Court. Failing to take action within this period will lead the IRS to finalize the substitute and bill you for any owed taxes.

Dates to Remember for Filing Taxes

tax calendar

As you step into a new financial year, it’s crucial to kickstart your tax planning, whether through tax-saving Fixed Deposits, Equity-Linked Saving Schemes (ELSS), or Public Provident Fund (PPF). Doing this early in the year is more efficient than waiting until the last minute.

Let’s check the important dates for filing ITR in India:

1. July 31: Deadline for Submitting Income Tax Returns

Ensure you file your income tax returns (ITR) for the financial year ending on March 31 by July 31 of the same year. It becomes obligatory if your total income, before deductions, exceeds Rs. 2.5 lakh (Rs. 3 lakhs for senior citizens above 60 years and Rs. 5 lakhs for those above 80 years).

Tax returns disclose your income for the previous year and the taxes already paid through tax deducted at source (TDS). If you’ve paid more taxes than required, you can claim refunds. Certain entities are exempt from filing returns by July 31, including corporate assesses, non-corporate assesses with audited books of accounts, partners in firms with audited accounts, and taxpayers required to furnish a report under section 92E.

2. March 31 (of Assessment Year): Deadline for Late or Revised Income Tax Returns

If you miss the July 31 deadline, you can file late returns by March 31 of the assessment year or upon completion of assessment by the assessing officer, whichever comes first (as per section 139(5) of the Income Tax Act, 1961). For instance, if you haven’t filed returns for FY2019-20 (AY20-21), you can file late returns by March 31, 2021, or when the assessing officer completes the assessment.

Since FY2018-19, a fee has been introduced under Section 234F for failure to furnish income tax returns. The penalty can reach up to Rs. 10,000, but it’s capped at Rs. 1,000 for taxpayers with incomes not exceeding Rs. 5 lakhs.

Also Read: Old vs New: Which Tax Regime is Better for 30 Lakhs?

3. March 31 (of Financial Year): Deadline for Tax-Saving Investments

To claim deductions, make tax-saving investments in ELSS, FD, PPF, insurance, etc., by March 31 of the relevant financial year.

Let’s take a look at the key dates for filing ITR in the United States:

The deadline for filing your tax return usually falls on April 15th for those following the calendar year. Most individuals fall into this category. If you’re an individual, the final day to submit your 2023 taxes without needing an extension is April 15, 2024, unless there’s an extension due to a state holiday. In case you needed more time, you could have used Form 4868 to ask for an extension to file later in the year.

For businesses operating on a fiscal year basis, the return is typically due on or before the 15th day of the third or fourth month, depending on the business entity, after the fiscal year’s end. If this due date lands on a Saturday, Sunday, or legal holiday, it gets moved to the next business day.

Importance of Filing ITRs

Person using calculator

Filing your tax returns offers several advantages, demonstrating your responsible citizenship. Here’s why it’s crucial:

  • Loan Applications: When seeking loans for significant purchases like a home, car, or medical treatment, lenders often require your tax returns from the past three years.
  • Visa Approvals: Quick visa approvals, especially for countries like Australia, the UK, USA, and Canada, may hinge on the submission of previous year’s tax returns as part of the visa processing requirements.
  • Foreign Transactions: According to Section 281 of the Income Tax Act, engaging in foreign or high-value transactions, such as asset transfers, necessitates providing a tax clearance certificate (ITR).
  • Tax Refund Eligibility: Filing tax returns allows you to claim tax refunds if you meet the eligibility criteria.
  • Proof of Income and Address: Tax return documents are valuable as they serve as proof of your income and address. They offer more precise details about your earnings, including salary, compared to Form 16.
  • Government Projects: Income Tax Returns from the past few years become essential if you plan to undertake any government projects. Regularly filing ITRs makes you eligible for tender applications.
  • Avoiding Penalties: Filing ITR not only assists individuals but also companies in steering clear of tax penalties and interest payments.

By fulfilling your tax obligations, you not only contribute to the smooth functioning of the financial system but also position yourself favorably in various aspects of personal and professional life.

What if I Can’t Afford to Pay Taxes?

If you’re unable to file a tax return due to financial constraints, reaching out to the IRS is crucial. The IRS offers various payment options tailored to your situation:

  • Short-term payment plans: You get a 180-day window to settle your bill in full.
  • Installment agreements: These enable you to make monthly payments over an extended period.
  • Offer in compromise: This entails a reduction in your tax debt through an agreement with the IRS.
  • Not collectible status: This designation postpones your tax payments if you’re unable to afford any at the moment.

Regardless of the reason for not filing, it’s advisable to act promptly. Filing overdue tax returns helps minimize potential interest and penalties and ensures you receive any owed tax refunds.

How Late Can You Receive a Tax Refund?

calculating taxes

If you’re anticipating a tax refund, it’s crucial not to procrastinate filing your tax return. The IRS typically allows you to claim a refund within three years of the return’s due date. Missing this deadline means you might lose out on the money you’re owed.

For instance, let’s consider your 2023 tax return. If you’re eligible for a refund that year but fail to file by April 18, 2027, you’ll forfeit that potential refund. Whether you’re tackling a late 2024 return or any overdue filings, it’s wise to explore the best tax software options to assist you in completing the task.

Also Read: Can Married Couples File Taxes Separately

Failing to file your taxes can lead to serious consequences. It is crucial to address the situation by finding appropriate solution with guidance from the authorities for a stable financial future.

Source: ​What happens if you don’t file ITR by July 31, 2023

Aditya Farrad

Aditya Farrad

Aditya is a seasoned business expert and the founder of Moneymint. He became a self-made millionaire at a young age thanks to his various online businesses. With years of experience running his own successful businesses, Aditya understands the unique challenges and opportunities that come with entrepreneurship.

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