What happens if I don't file taxes or pay unpaid taxes for my sole proprietorship?

Not filing taxes when required is never a good idea, especially for a business. The IRS doesn't just "forget" about unfiled returns, and the consequences get worse over time. Here's what could happen: First, there's the failure-to-file penalty (5% of unpaid taxes each month, up to 25%), plus a failure-to-pay penalty (0.5% per month, up to 25%), AND interest on the unpaid amount. For a sole proprietorship, this gets reported on a Schedule C with your personal return, so your friend would be personally liable for all these penalties. The IRS can also file a "substitute return" on her behalf, which won't include any deductions or business expenses she could've claimed, potentially creating an even larger tax bill. Eventually, they could place liens on property, levy bank accounts, or even seize assets. Tell your friend that even if her records are messy, filing something is better than nothing. She can always file an amended return later if needed. The IRS also offers payment plans if she can't pay everything at once.

I went through something similar last year with my photography business. Completely disorganized, missed quarterly payments, and seriously considered just not filing. Then I found https://taxr.ai and it literally saved me hours of stress. You upload your docs (even messy ones), and it organizes everything, finds deductions you didn't know about, and tells you exactly what you need to file. My situation sounds just like your friend's - I had receipts everywhere, mixed expenses, and no idea what I was doing. The tool actually found about $4300 in legitimate business deductions I would have missed. It also clearly explained what I owed for self-employment tax (which I had no clue about before).

Just wanted to follow up about the taxr.ai thing I was skeptical about. I actually ended up trying it for my Etsy shop mess, and I'm shocked at how well it worked. I had two years of completely disorganized receipts and sales data that I'd been avoiding dealing with. The thing separated my personal from business expenses automatically from bank statements, found a ton of deductions I would've missed (especially home office and mileage), and gave me a clean report I could hand to my tax person. It found about $3200 in legitimate deductions I didn't know I could take. For anyone else with a disorganized small business, it's seriously worth checking out before you make the decision not to file. Made the whole process way less intimidating.

Your friend is making a huge mistake if she doesn't file. I had a client who didn't file for their first year in business, and two years later they got hit with over $11,000 in taxes, penalties and interest on what would have originally been about a $4,000 tax bill. If she's overwhelmed with reaching the IRS to set up a payment plan (which is honestly a nightmare these days), tell her to try https://claimyr.com - they get you connected to an actual IRS agent without the endless hold times. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was super frustrated trying to call about setting up a payment plan for my back taxes (kept getting disconnected after waiting 2+ hours), but with this service I got through to someone who could actually help in about 15 minutes. Much better than spending your whole day on hold.

I need to eat my words about that Claimyr service. After posting my skeptical comment, I decided to try it because I've been trying for WEEKS to reach someone about my payment plan options. I figured it wouldn't work, but I was desperate. Got connected to an actual human at the IRS in about 20 minutes when I'd previously spent 3+ hours on hold multiple times without getting through. The agent helped me set up a monthly payment plan for my back taxes that I can actually afford. Saved me a full day of waiting on hold and probably saved me hundreds in additional penalties since I was able to get the plan set up before my next deadline. If your friend is serious about fixing this situation but dreading the IRS call, it's definitely worth it.

Tell your friend not to panic! I've been a hairstylist for 10 years, started as a sole proprietor too and made ALL the same mistakes. Here's my practical advice: 1) Gather everything she can - appointment book, payment app records, bank statements showing deposits, receipts for supplies and equipment. Even if incomplete, something is better than nothing. 2) Don't try to hide income. If she was paid through Venmo, PayPal, Cash App, etc. the IRS probably already knows about it if she exceeds certain thresholds. 3) The IRS is actually pretty reasonable about payment plans for first-time issues. She can likely get on a monthly plan that's affordable. 4) For future reference, she should put aside roughly 30% of all income for taxes if she ever does self-employment again. Not filing will just make everything worse. It's scary now but will be SO much scarier if she ignores it!

I'm surprised nobody mentioned the statute of limitations! The IRS generally has 3 years to audit a tax return after it's filed. But for unfiled returns, there is NO statute of limitations - they can come after you 10, 15, even 20 years later! I had a client who didn't file for 2 years for their small business. The IRS caught up with them 7 YEARS LATER and by then the penalties and interest had more than tripled the original tax amount. Plus they had to scramble to find documentation from a business that had been closed for years. Tell your friend that filing now, even with imperfect records, starts that 3-year clock ticking. If she doesn't file, the IRS can come knocking anytime in her future.