Penalties

• When you fail to file your income tax returns, the IRS can impose an array of penalties on you if any amount of tax is past due. The most severe is the fraud penalty that is equal to 75 percent of the tax you don't pay that should have shown up on your return. For this penalty to apply, the IRS must generally show that your motivation for not filing a tax return was to evade income tax. However, even if the IRS is unable to prove this, you can be hit with a 4.5 percent penalty for each month a return is late plus an additional half-percent for paying late. The maximum combined penalty is 25 percent or five months and is calculated on your tax underpayment.
  
  

Interest

• In addition to the penalties you must pay, the IRS will charge you interest on both the tax and penalty amounts that remain unpaid. There is no maximum interest charge the IRS can impose, and the charges will accrue until you finally pay the tax. Interest is charged on a monthly basis using the annual federal short-term interest rate increased by three percentage points.
  
  

Liens and Levies

• In addition to it costing you more money, the IRS can make your life miserable if it places a lien or levy on your property. A tax lien essentially provides the IRS with a legal claim on property you own. For example, if a tax lien is placed on your home, you need not vacate, but it will be nearly impossible for you to ever sell the home until your taxes are paid and the lien is removed. This is because the lien can be enforced against a subsequent owner. In the event the IRS does allow you to sell the home to pay off your taxes, it will ensure that the transaction is done in such a way that it receives its payment before anyone else. A tax levy is even more severe than a lien. In this case, the IRS can garnish a large portion of your wages and is not subject to the same limitations as most other creditors.
  
  

Unlimited IRS Assessment

• If liens, levies, interest and penalties are not incentive enough for you to file your taxes, also be aware that until you file your returns, the IRS has an unlimited amount of time to audit you and determine your tax liability. Under normal circumstances, the IRS has three years from the time you file your return to conduct its audit. Provided your return is relatively accurate, the IRS would be unable to assess additional taxes even if you did in fact owe it. This is the protection you lose by not filing your returns.