You generate tax problems when you don't file your income tax returns. After ignoring many notices to file a tax return, the IRS will prepare one for you, called a Substitute For Return (SFR).
The IRS uses income that has been reported to them, such as wages, interest income, subcontractor payments, sale of property, etc., and then assumes you are single, have no dependents, and uses the standard deduction.
Now you have a larger tax bill, even though you didn't actually file a tax return. You also have created other problems. You can't get an installment agreement without filing the missing returns, even the SFR's. You can't submit an Offer in Compromise if there are missing returns. Bankruptcy won't clear off old years if those returns were not filed by you. And the IRS will continue to try to collect on the SFR billings.
While there are many reasons why a taxpayer may not file a tax return, you need to aware of the following:
Failure to file tax returns may be construed as a criminal act by the IRS.
This type of criminal act is punishable by one year in jail for each year not filed.
Needless to say, it's one thing to owe the IRS money, but another thing to potentially lose your freedom for failure to file a tax return.
The IRS may file "SFR" (Substitute For Return) Tax Returns for you. This is the IRS's version of an unfiled tax return.
Because SFR returns are filed in the best interest of the government, the only deductions you'll see are standard deductions and one personal exemption.
You will not get credit for deductions which you may be entitled to such as exemptions for spouses, children, interest and taxes on your home, cost of any stock or real estate sales, and business expenses, etc.
