The consequences of not filing on time (or at all)
Not filing your taxes can come with some serious consequences. For one thing, the Internal Revenue Service (IRS) will start charging penalties that accumulate over time. Penalties include both a “failure to file” penalty (5% of your unpaid tax amount each month) and “failure to pay” penalty (0.5%) — or a flat 5% for both penalties. Each penalty is up to a total of 25% of the tax due.
On top of this, interest accumulates on whatever amount is withstanding starting from the tax deadline. As of the first quarter of 2025, the rate stands at 7%. Interest accrues on the entire amount, from the amount of taxes you owe, to penalties and unpaid interest. That starts to add up — and fast. As time passes, your tax debt will grow.
If you don’t file your taxes, the IRS could prepare your tax return for you, which is called a substitute for return (SFR). This isn’t ideal, since it probably won’t include any tax credits or deductions you’re eligible for, which means you could end up paying more tax. With an SFR, you can either accept it or choose to refile your tax returns — along with any tax credits and deductions available to you.
But, if you ignore it, the IRS could issue a notice of deficiency and start the debt collection process. The agency can garnish your wages and retirement accounts. It can take money from your bank accounts or even seize your property and sell it. Any future federal tax refunds or state income tax refunds that you're due may also be seized and applied to your federal tax liability. The IRS may file a Notice of Federal Tax Lien, which would be a part of public records and affect your ability to get credit.
These are not the only consequences of not filing. If you don’t report self-employment income, you won’t receive credits toward Social Security retirement. It also means you may not be able to get a loan, since you won’t have a tax return to prove your income level.
You would face criminal prosecution, with the possibility of fines and jail time, if you’re believed to have intentionally committed tax evasion or tax fraud, but this is very unlikely.
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Learn MoreHow to fix your tax situation
In 2023, 64 million Americans performed freelance work, which is 38% of the U.S. workforce, according to an Upwork study. Freelancers are considered sole proprietors or gig workers, and need to report any income and losses via Schedule C (Form 1040).
A traditional employee gets a single W-2 form to file their taxes, which makes filing taxes relatively straightforward. But a freelancer who works with multiple clients on multiple projects will end up with numerous 1099 forms and possible 1099-K forms (if they receive payments through online services such as PayPal or Venmo).
You can start to fix your tax situation by gathering all your documents, including the last return you filed, any letters or notices from the IRS and any tax documents you’ve received. You’ll also want to document your income and business expenses.
It’s best to be proactive. If you contact the IRS, you may be able to work out a payment plan, but you will need to file all your required returns first. You may also request the IRS to delay the collection process. If your financial situation is extremely bad and you're eligible, you can apply for an offer in compromise to pay less than you owe.
You may also consider applying for a personal loan to pay your tax debt if it makes financial sense for you.
Since you’re dealing with five years of back taxes, you may want to consider the help of a tax professional who specializes in working with self-employed workers. An enrolled tax agent may cost a bit of money upfront, but could help to resolve back taxes and negotiate a solution with the IRS.
Staying compliant going forward
Once you have filed your back taxes and perhaps worked out a payment plan with the IRS, you’ll want to make every effort to stay compliant going forward.
Self-employed workers pay federal and possibly state income taxes, as well as a 15.3% self-employment tax, which covers Social Security and Medicare. But self-employed workers can also claim business-related deductions, including phone and Internet service, computer equipment, office expenses and business-related travel. Freelancers who work from home may also be eligible for the home office deduction.
Once you have sorted out your income sources, expenses, deductions and credits from the past five years, you can create a document or spreadsheet — or use a software program — to keep track of those categories going forward. For example, you can create a document to track your clients, assignments and income for the year. An accounting software program could be a worthwhile investment to make this process easier.
While freelancers file annually like everyone else, they’re also required to make quarterly payments throughout the tax year. By keeping detailed records of her income and expenses — and by setting money aside for tax payments — you will be better prepared come tax time.
This could also help you estimate how much you’ll owe in the upcoming tax season, which could significantly reduce your stress. If you want to further reduce your stress — or don't want the hassle of crunching the numbers — you could also work with a bookkeeper or use accounting software to help manage your finances.
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