If you don't file federal or state income tax returns -- and don't pay income taxes -- you risk a number of legal and financial consequences. With every passing year, you could be placing both your immediate and long-term financial well-being in jeopardy.
Penalties and Prosecution
The IRS imposes a penalty of five percent of the total tax due, up to a maximum of 25 percent of the total past-due tax bill, for every month after the deadline that you fail to file an income tax return. If you do not file a federal tax return within 60 days after the due date, the IRS imposes a penalty of $135 or 100 percent of the past-due tax bill, whichever is smaller. This is in addition to the penalty imposed by the IRS for failure to pay past due income tax of one-half of one percent for each month that you fail to pay past-due income tax, up to a maximum of 25 percent of the total past-due tax balance. The IRS may pursue income tax evasion charges against taxpayers who flagrantly refuse to file income tax returns or pay past-due taxes. Non-filers may face liens on their personal property from the IRS and from states.
Receiving Refunds and Earned Income Credit
Many people are not required to file income tax returns because their incomes fall below thresholds established by the IRS or state governments. Nonetheless, these non-filers often miss out on financial incentives such as the Earned Income Tax Credit. Workers of all income levels who had income taxes deducted from their paychecks may also miss out on receiving income tax refunds if they do not file income tax returns.
Qualifying for Social Security and Medicare
If you don't file income tax returns or pay income taxes, you may endanger your eligibility for Social Security benefits, Medicare or both. You may find that you do not qualify at all, or that your benefits are sharply reduced from what you would have otherwise received. Workers receive conventional Social Security and Medicare benefits based on how much money they have paid into these programs during their working lives. Income from individuals who do not report income or pay taxes on income does not count in the computation of federal retirement benefits.
Establishing and Maintaining Credit
Banks, lenders and merchants use your income as a major factor in determining whether to grant or deny credit. If you don't file income tax returns or pay income taxes, creditors and lenders will receive an incomplete picture of your finances that will not work in your favor. Not only will you not receive full credit for your income, if you have any debts, you will present a less favorable income to debt ratio, which is critical to establishing a high credit score.