What Happens if I Don’t File My Unemployment on My Taxes?

Filing taxes is a responsibility for individuals, and accurately reporting all sources of income is essential. Unemployment benefits are taxable income, and failing to report them can lead to serious financial consequences.

Tax Liability for Unreported Unemployment

Unreported unemployment benefits can result in unexpected tax bills. The IRS requires unemployment compensation to be included in gross income on Form 1040, with the tax rate depending on the individual’s overall taxable income and filing status. For example, someone in the 22% tax bracket will owe taxes on the unreported benefits at that rate, potentially creating a significant financial burden.

The IRS uses information matching to verify reported income. Employers and state agencies file Form 1099-G to report unemployment benefits to the IRS. If the amounts reported by the taxpayer do not align with IRS records, the agency may automatically adjust the return, adding the unreported income and recalculating the tax owed. This adjustment often increases the tax liability.

Additionally, unreported benefits can affect eligibility for tax credits like the Earned Income Tax Credit (EITC) or the Child Tax Credit (CTC). These credits have income thresholds, and including previously omitted unemployment benefits may push taxpayers above those limits, reducing or eliminating the credits.

Potential Penalties and Interest

Failing to report unemployment income can trigger penalties and interest charges. The IRS imposes a failure-to-pay penalty of 0.5% of the unpaid taxes each month, up to a maximum of 25%. Interest on unpaid taxes accrues daily from the original due date of the return, based on the federal short-term rate plus 3%. These additional costs can make settling tax debts more challenging.

If the omission is due to negligence or disregard for IRS rules, the agency may also impose an accuracy-related penalty of 20% of the underpayment.

Possible Audits and Investigations

Omitting unemployment benefits increases the risk of an IRS audit. The agency’s automated systems flag discrepancies in tax filings, which can lead to a correspondence audit requesting explanations or documentation. If issues remain unresolved, the IRS may conduct a full audit, reviewing financial records like bank statements and pay stubs. The IRS typically examines returns from the past three years, but this window extends to six years in cases of substantial income underreporting.

In extreme cases, the omission of unemployment benefits may be viewed as intentional tax evasion, prompting a criminal investigation. The IRS Criminal Investigation Division (CID) handles such cases, and proven intent to defraud can result in severe penalties, including fines or imprisonment.

Steps for Correcting the Omission

To address unreported unemployment benefits, taxpayers should file an amended return using Form 1040-X. This form allows for corrections by including the accurate income figures. Taxpayers must attach a copy of the Form 1099-G that details the unemployment benefits.

Amending a return may result in additional taxes owed. To avoid further issues, taxpayers should calculate and promptly pay any outstanding amounts.

Impact on Future Filings

Failing to report unemployment benefits can lead to long-term consequences, such as increased scrutiny from the IRS in future filings. Taxpayers who amend returns or have discrepancies flagged may be categorized as higher-risk, facing more frequent audits or requests for documentation in subsequent years.

Additionally, unreported income can affect financial dealings like loan or mortgage applications. Lenders often review tax transcripts to verify income, and discrepancies or amendments can raise concerns. For instance, changes to adjusted gross income (AGI) after reporting omitted unemployment benefits may alter debt-to-income ratios, potentially impacting loan eligibility.