If a taxpayer does not file, it could result in various actions. If there is no tax and no filing requirement, (say he only makes $4,000 a year which is less than his standard deduction
+ exemption), then nothing might happen.
If he had more income, the IRS may start sending notices to him asking for the returns. If the IRS does not get a reply, the various payors such as his employer, bank, etc. would have reported their information to the IRS. The IRS may take this information and prepare a substitute tax return for him based on this information and information based on prior year returns. Of course, when they do that, they give the least favorable items and send a usually large notice for tax, late filing penalty, late payment penalty and interest. There is usually no "civil penalty" unless fraud was involved. They give taxpayers a chance to file a corrected ("true") return after this. It is better to file and pay any tax as soon as possible as this will limit the accruals of late filing penalty, late payment penalty and interest. If you have a refund due back instead of owing tax, a taxpayer must file within 3 years of the original return due date
or extension or the IRS will not issue the refund due to the refund statute. The IRS may also share information with state and local
tax agencies if returns are required to be filed with them also. Similar actions with state and local agencies could result.
I hope this helps. Please be sure to click the green accept button below as I do not get credit for the answer if you don't. Thanks!
Edited by J. Michael Knoebel on 10/2/2009 at 4:39 PM EST