IRS back taxes creep up on unsuspecting individuals who haven’t settled their dues with the Internal Revenue Service (“IRS”) or state taxing authority by the due date. These liabilities can be income taxes, payroll taxes, self-employment taxes, and more, even encompassing taxes assessed during an IRS audit. When taxes are not paid, the IRS unsheathes its sword of penalties and interest, inflicting additional wounds on the unpaid sum. If delinquent tax debt remains unattended, the consequences can be dire, ranging from wage garnishments and property liens to the chilling prospect of criminal charges.
Why Do You Owe Back Taxes?
There are three reasons why you might have fallen behind in paying your taxes:
- Insufficient Withholdings or Lack of Estimated Tax Payments or federal tax deposits
- Audit
- Not Filing Your Returns
Let’s tackle each one in turn:
Insufficient Withholdings or Lack of Estimated Tax Payments
One of the most common reasons for owing back taxes is that you or your business has not paid enough taxes throughout the year. This can happen if you have not had enough taxes withheld from your paychecks or if you have not made estimated tax payments. You need to pay estimated taxes four times a year if you’re self-employed to insure you do not owe taxes when you file the return.
The Dreaded Audit
Another reason could be that the IRS audited a tax return and determined there was additional tax due. This could be because you didn’t have the tax documents needed or because the IRS disallowed certain tax credits, or because you inadvertently overstated certain tax deductions. Sometimes, you don’t even realize the IRS audited you end up with an unexpected bill in the mail.
Not Filing Your Returns
If you failed to file tax returns for the previous year or years, you could also owe because the IRS created a tax return for you and determined an amount due. The IRS considers this the same as other outstanding debts and will try to collect the balance due. Often, the amount owed is dramatically hiring than if you had filed the return yourself in the first place.
How Do You Resolve Back Tax Issues?
If you owe back taxes, it is important to address the issue as soon as possible. The longer you wait, the more penalties and interest will accrue, making the debt larger and more difficult to pay off. The interest rate changes every quarter and accrues on all unpaid taxes. You’ll also have to pay penalties, but those do have a maximum.
The IRS offers several options to resolve your tax bill, including installment agreements and offers in compromise.
Installment Payment Plans to Resolve Your Tax Bill
IRS payment plans allow you to pay your taxes in monthly payments over a period of time. To qualify for an IRS payment plan, you must have filed all past-due tax returns and must not be currently in an open bankruptcy proceeding. If you are missing a tax return, you’ll want to submit them as soon as possible. Additionally, you must agree to comply with all future filing and payment requirements to be eligible for an installment agreement.
The IRS will look at your monthly income, the outstanding tax liability, and other information when deciding on whether to grant the installment agreement. You may also be able to set up monthly agreements without even providing any financial information. You can do so on the IRS website. If you owe the IRS, a payment plan is a good option to deal with unpaid taxes. Depending on the type of payment plan, various tax forms need to be completed to determine the monthly income and installments. You should also know that the IRS will tax any tax refund due to you while there’s a debt outstanding.
Offer in Compromise to Resolve Tax Debt
An offer in compromise (OIC) is a settlement agreement between you and the IRS. It allows you to settle your tax debt for less than the full amount owed. To qualify, you must have filed all required tax returns and must not be currently in bankruptcy. If you’re missing a tax return, the IRS will not even consider the offer in compromise. Additionally, you must demonstrate that you are unable to pay the full amount of the tax debt — in other words, there must be some financial hardship.
Most commonly, you’d make an initial payment of 20% of whatever you’re offering. It is important to note that the IRS evaluates each offer in compromise on a case-by-case basis and not all taxpayers will qualify for an OIC. Additionally, the IRS has a strict set of criteria that must be met to be considered for an OIC. You should seek the help of a tax professional when considering this option. But be careful, nationwide tax relief companies often prey on taxpayers who don’t even qualify to do OICs for extremely large fees.
The IRS continues to take tax refunds and charge interest while the offer is pending. They’ll also continue to take your tax refund until the offer in compromise is accepted. Most taxpayers will also need to pay an application fee. You also need to make sure all necessary paperwork is included with the offer. An offer can be filed using a lump sum method or an installment plan that lasts 24 months. If the IRS accepts the offer, you need to stay in compliance for 5 years, meaning you need to pay taxes in future years on time.
The IRS also offers non-collectible status for taxpayers who can’t afford to pay anything currently. Essentially, you can’t have any money left over after paying your ordinary bills. Like with the other options, all prior year tax returns need to be filed. If you’re missing a tax return, you’re not eligible for this option.
IRS Enforcement
If you are unable to pay your back taxes, the IRS may take enforcement action against you. This is especially true if you continue to ignore the tax bill you receive in the mail. This can include wage garnishment, where the IRS takes a portion of your wages to pay off your delinquent tax debt due, or federal tax liens, where the IRS places a claim on your property. The IRS may also seize assets such as bank accounts, vehicles, and even real estate. They’ll also take your federal and state tax refunds.
It is important to note that the IRS generally follows a series of steps before taking enforcement action. They will typically send a series of notices and make efforts to contact you before taking any action. Additionally, the IRS will generally allow you to appeal their decision.
In extreme cases, the failure to pay taxes can result in criminal charges. The most serious charge is tax evasion, which occurs when a person willfully attempts to evade paying taxes. This is a federal crime and can result in fines, imprisonment, or both.
Additionally, it’s essential to work with a tax professional who can help you navigate the process and understand your options. But stay away from a tax relief company as those have a well-documented history of ripping people off.
If you are unable to pay your back taxes, it is important to communicate with the IRS and let them know your situation. The IRS may be willing to work with you to find a solution for resolving tax debt that is manageable for you. Additionally, they may be able to provide you with information on available tax relief programs that can help you pay off your tax debt. Resolving tax debt is achievable — many people who owe the IRS enter into an installment payment plan to resolve it.
In conclusion, owing back taxes can be a stressful and overwhelming situation, but it is important to take action and address the issue as soon as possible. The IRS offers several options for paying back taxes depending on your financial situation, including installment agreements and offers in compromise. But the IRS charges interest and will levy your bank account if you don’t take any action.
It is also important to communicate with the IRS, work with a professional, and consider all available tax relief programs. By taking action and addressing the issue, you can resolve your back taxes and avoid serious consequences.
