What If I Don’t File a Tax Return With My W-2?

A W-2 form summarizes annual wages, tips, and other compensation, along with taxes withheld, provided by employers to employees. This statement is used to prepare federal and state income tax returns; it is not filed by the individual. The information on a W-2 is fundamental for accurately reporting income and calculating tax liabilities. This article explores the consequences of not filing a required tax return when income has been reported on a W-2, and outlines steps to resolve unfiled returns.

How the IRS Tracks Your Income

The Internal Revenue Service (IRS) tracks individual income for tax compliance. A primary method is third-party reporting, where employers submit income forms directly to the IRS. Employers send W-2s to the Social Security Administration (SSA), which then shares this information with the IRS.

The IRS also receives information from other forms, including Form 1099-NEC (non-employee compensation), Form 1099-INT (interest income), and Form 1099-DIV (dividends). These are submitted by payers like banks, brokers, and clients.

The IRS employs the Information Returns Program (IRP) to match third-party reported data with income on individual tax returns. This program cross-references W-2s and 1099s against income declared on Form 1040, U.S. Individual Income Tax Return. Discrepancies can trigger an IRS inquiry.

Consequences of Not Filing Your Tax Return

Not filing a required federal income tax return by the due date, especially when taxes are owed, can lead to significant penalties and interest. The IRS imposes a Failure to File Penalty of 5% of unpaid taxes for each month or part of a month a return is late, capped at 25% of the unpaid tax. For returns filed more than 60 days late, a minimum penalty applies: the lesser of $485 for 2024 returns, or 100% of the tax due.

A Failure to Pay Penalty may also be assessed, which is 0.5% of unpaid taxes per month, capped at 25%. If both penalties apply, the failure to file penalty is reduced by the failure to pay penalty, resulting in a combined maximum of 5% per month (4.5% for failure to file and 0.5% for failure to pay). The failure to file penalty maxes out after five months, but the failure to pay penalty accrues until the tax is paid, up to its 25% maximum.

Interest accrues on underpayments from the original tax due date until paid in full, applying to both unpaid tax and penalties. For individuals, the underpayment interest rate for the quarter beginning January 1, 2025, is 7% per year, compounded daily, adjusted quarterly. The IRS applies payments first to tax owed, then penalties, then interest.

If a refund is due, there is no failure to file penalty. However, the right to claim a refund expires three years from the original return’s due date. Not filing a return claiming a refund within this period may forfeit the refund.

Steps to Resolve Unfiled Returns

Addressing unfiled tax returns promptly mitigates penalties and interest. The first step is preparing and submitting all delinquent tax returns quickly. Filing the return, even without immediate payment, stops the failure-to-file penalty accrual.

To prepare returns, gather all income documentation. If W-2s or 1099s are missing, request copies from employers or payers. Alternatively, obtain a wage and income transcript from the IRS, which provides information from all reported income documents. This transcript can be requested online or by submitting Form 4506-T.

Once documentation is collected, prepare the tax return using software for prior years or with a qualified tax professional. Accurate reporting of all income and claiming eligible deductions and credits helps calculate tax liability. Filing an accurate return is important, even if unable to pay the full amount due.

If taxes are owed and cannot be paid immediately, several IRS payment options exist. A short-term payment plan may allow up to 180 additional days to pay the balance, though interest and penalties apply. An Offer in Compromise (OIC) allows some taxpayers to settle their tax debt for a lower amount based on ability to pay. An Installment Agreement allows monthly payments for up to 72 months.

Taxpayers may request penalty abatement. This relief is available through the First-Time Penalty Abatement program if the taxpayer has a clean compliance history for the preceding three tax years and has filed all required returns or arranged to pay any tax due. Abatement can also be requested based on reasonable cause, such as serious illness or natural disaster, which prevented timely filing or payment. After filing, IRS notices, like CP notices, should be reviewed and responded to promptly.