Penalty for Not Filing Return if Owe Nothing

Failure to file penalties are a percentage of what you owe. Be prepared to show evidence if the IRS comes knocking in three years.

But in this case, what penalties would there be if the person paid everything they owe plus a smidge more during the year through withholding, and kept doing this year after year? That's the premise of the question.

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When you first posted, I did some searching on irs.gov, just out of curiosity. I didn't post because I didn't find an answer to the specific question. It sure looks like the law (quoted on irs.gov) assumes anyone who doesn't file must owe money, because the law and IRS instructions say that the penalty for "failure to file" is a percentage of the unpaid amount -- in effect, there _is_ no penalty for failure to file as such, only for failure to pay.

But I'm not a tax professional, and this just seems too simple. Instructions for Form 1040 list various scenarios in which you must file, based on income amount and source. I find it hard to believe there isn't _some_ penalty in the law for failure to file if you fall into one of those categories.

Or six years or ten years or more. If you don't file, the statute of limitations never starts to run. So at some time in the future the IRS decides that you owe them money, they can come after you forever.

But how does the IRS know that all that person's taxes have been paid? They won't just assume that no return means everything is fine and that no money is due.

But what's the remedy? If the penalty for failing to file is some percentage of unpaid taxes, in this case there are no unpaid taxes. In this case, the IRS computers will see that it has collected taxes from a particular SSN and that the person has incurred a certain amount of income, and the computers will calculate that the right amount was paid. Sure, the computers will also detect that no returns have been filed, but since the statutory remedy is apparently to bill the customer for unpaid taxes, isn't the likely result that the taxpayer will get a bill showing either zero owed or else a small credit due back to the customer?

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The IRS may well assume that your income is as reported, and you are entitled to no deductions, which would mean more taxes than were paid in. If you don't keep records well enough to file a tax return, you may not have good enough records to keep from owing taxes when you shouldn't.

It *might* be possible if they were single, but not if they were married. After several years of unfiled returns, the IRS will begin preparing SFR freturns for the taxpayer. In the case of a married taxpayer, the returns will be prepared as if the taxpayer was single. If the withholdings were planned using MFJ rates they would be insufficient.

Even as a single taxpayer, the task would take more effort than it's worth, since payroll withholding tables are often designed with political objectives in mind and not to exactly match a projected tax liability.

Ira Smilovitz, EA Leonia, NJ

I get all that, but the premise of the question is that the taxpayer is crafty enough to withhold just enough money to cover the worst case the IRS would assume - i.e., no deductions allowed or standard deduction, whatever. I'm assuming this is a person who is doing this as some kind of statement or "thing" and is keeping sufficient records to make sure they always stays ahead of the game, so to speak. They may even be filling out a dummy return each year without filing to make sure they always withhold enough.

The real point of the question is how the IRS would react to this and whether they have any real mechanism for dealing with someone like this who is literally always paying what they owe without actually filing. As someone else stated, there doesn't appear to be anything on the IRS site that mentions any kind of penalty for failing to file other than having to pay some multiple of unpaid taxes.

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Many of the answers don't answer your specific question but give the valid advice that if the IRS comes knocking, the burden is on you to file correct returns and show that you don't owe anything, in which case the penalty would be zero, so it seems.

I recall a long time ago hearing of some guy we knew who would do something similar: he would make sure he over withheld, then didn't file taxes for a few years because it wasn't worth the hassle. Never heard if the IRS ever came knocking, or for how many years he did this. I also don't know if he was prepared to file and show he didn't owe anything. Seems most people of this mind, i.e. too much of a hassle, would likely think keeping records is too much of a hassle too.

I trust this is merely an academic question, eh?

So it sounds like what you're saying is that the IRS response after seeing no returns filed for multiple years would be to file an SFR return (which Google informs me is a "Substitute for Return"), and if the taxpayer has paid enough, then no further action is taken. I agree this sound like more effort than it's worth, but the original premise of the question was someone doing this knowingly and craftily, making sure they withhold enough to cover what the IRS could calculate (e.g, withholding at the single rate and possibly even having additional amounts withheld to make sure there is no balance). Not sure why someone would do this - maybe to make some kind of political statement or perhaps to just sock it to the IRS - but it seems clear they could get away with it.

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Yes, but an SFR return is generated using the best outcome for the IRS, not the taxpayer. The "oh so clever" taxpayer in this scenario would have to withhold amd pay more tax than might be the actual liability.

Ira Smilovitz, EA Leonia, NJ

Yes, it's strictly academic, but something I've long wondered about. I'm intrigued you've actually heard of someone doing this.

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"Under IRC 6501(c)(3), the statute of limitations does not start to run until a valid return is filed. Once filed, the statute for assessment expires in three years. If a taxpayer never files a return, there is no statute of limitations on IRS for assessing tax with respect to the unfiled year."

IMHO, that's the real penalty for failure to file when owing no tax: never knowing when the IRS would decide to go after one. That process would be quite painful, I imagine, whether or not one actually ended up owing money for the year in question.