What are Back Taxes?
Back taxes are taxes that still have a balance due or are only partially paid. Typically, if you owe back taxes, the IRS will send you a notice with the amount you owe, a due date, and the consequences of not paying. If you do not know how much you owe, you can contact your local IRS online and ask them.
Taxpayers can have back taxes at the Federal, State, or even Local levels. Likewise, you can owe personal and business liabilities.
Tax debt is subject to interest which it will gain at a constant rate. Even though you have not received a notice from the IRS, your back taxes will accumulate interest over time.
In our economic climate, owing the IRS back taxes is not uncommon, just as taxpayers disregarding their tax debt is not uncommon. However, if you owe back taxes, do not overlook your overdue tax liability – the consequences can be severe.
What To Do If You Owe Back Taxes?
If you are curious about how to pay back taxes, the means of payment varies depending on how much you owe and how much you can pay.
Sometimes, repayment is as simple as sending a check to your local IRS office. Other times, paying back taxes is a little more complicated. Another viable option is to take advantage of the IRS’s tax repayment programs. The IRS will always appreciate your efforts to pay taxes, even if they are past due.
To prevent yourself from being overwhelmed by interest rates and penalties, you must completely repay your taxes as soon as possible.
IRS Repayment Programs
The IRS Fresh Start Initiative gives taxpayers access to various programs to repay their back taxes. Some of these programs offer you certain protections from collections, rights reserved only for those who qualify.
The IRS’s primary criteria for eligibility is your financial situation. Depending on what program you qualify for, you can enter into a payment plan, temporarily halt penalties, or settle your tax debt for a fraction of the original.
There are four main programs available to taxpayers through the Fresh Start Program:
Installment Agreement – A payment plan that allows taxpayers to pay an agreed-upon amount every month to the IRS. These payments go directly to the taxpayer’s overall tax debt and continue until they pay their debt in full. The IRS cannot send letters or use penalties against you while on an installment plan. However, the IRS can continue to apply interest to your tax liability.
Offer in Compromise – An agreement that allows taxpayers who owe back taxes to resolve their debt for less than the full amount. Although it is the best option available through the Fresh Start Program, the qualifications are strict. Typically, the IRS will only accept taxpayers who do not have the financial resources to pay off their back taxes in full.
Currently Non-Collectible Status – A taxpayer can request that the IRS place them in a non-collectible status if they cannot pay their back taxes at the present moment. While this status does not necessarily remove tax debt and does not last indefinitely, it does stop all collection activities. Such activity includes bank levies, wage garnishments, tax liens, and threatening letters from the IRS.
Penalty Abatement – The term used to describe when the IRS wipes out or reduces a penalty. The IRS will only apply penalty abatement for a reasonable cause; they will need sufficient evidence. Proper documentation is the best form of evidence to secure a successful penalty abatement.
Should You Seek Professional Help If You Owe Back Taxes?
When choosing to use a tax professional’s service, be sure to consider your financial situation and how much tax debt you owe.
As mentioned above, sometimes resolving tax debt is as easy as writing a check. Nevertheless, for those struggling with significant tax debt, we strongly encourage that you pursue any one of the IRS Fresh Start programs.
Keep in mind that few applications for tax relief programs get accepted. The low rate of acceptance is due to the IRS’s convoluted and confusing criteria.
For this reason, a taxpayer who owes back taxes may reach the best outcome by contacting a tax professional. An expert can help taxpayers determine which option will offer the most effective resolution for their specific set of circumstances.
Advantages of Hiring a Professional
Within the Taxpayer Bill of Rights is the right for taxpayers to retain an authorized representative of their choice when dealing with the IRS.
A tax expert will fare favorably with the IRS. The IRS prefers to work with them because it makes their job easier. Tax experts also know how to pay back taxes and how to resolve tax debt. Since they are familiar with the tax code, your representation will know what to do if you owe back taxes.
Tax professionals bring experience, insight, and resources to your case. A practiced eye can examine your situation and come up with an ideal strategy. Plus, an expert can skillfully dialogue and communicate with the IRS.
With the assistance of a tax professional, your time commitment will drastically decrease. Almost all of the resolution workload is the job of the expert. You will only be required to provide your legal representative with the appropriate documentation promptly.
You will be able to continue working, taking care of your family, and busying yourself with other necessary matters without considerable interruption.
Resolving Back Taxes On Your Own
Two important considerations are the professional’s fee and how much time and effort you are willing to dedicate to your case.
For example, if you have a relatively low tax bill – $5,000 or less – you might be better off getting into an installment agreement with the IRS on your own. You will save yourself money by forgoing a tax expert.
Should you get audited by the IRS but have all your documents, files, and records in order and can verify everything on your returns, you won’t need a tax lawyer.
Nevertheless, without legal representation, you run the risk of saying something factually inaccurate, becoming overly emotional, or getting talked into a less than ideal resolution.
Owing the IRS Back Taxes
Owing money to your friend is one thing, but owing back taxes to the IRS is another matter entirely. The number one fear of the IRS stems from the general public not knowing what happens when they owe taxes.
While it is unlikely that government agents will come to knock on your door or email you, it will become harder and harder to avoid IRS collection efforts. Especially now, with both State and Federal governments pressed for funds.
If you owe back taxes to the IRS, the best thing you can do is pay your back taxes as soon as possible.
How Do You End up Owing the IRS?
One of the reasons taxpayers end up owing back taxes to the IRS (and, by extension, the federal government) is that they paid fewer taxes during the year than they owed for their income level.
Other explanations could be that you have had a recent change to your tax situation. Such changes include new jobs, marriage, divorce, new dependents, and aging children. These changes to your filing status can affect what you withhold, which deductions you can report, and what tax forms you must sign and complete.
Additionally, filing late, paying late, or simply not filing or paying at all; can lead to the accumulation of back taxes. Eventually, you will have what is known as an outstanding tax liability.
How Does the IRS Know I Owe Back Taxes?
Each year, the Federal Government claims it loses millions of dollars in tax revenue to unpaid taxes. To compensate for their losses, the government allocates more and more resources to the IRS for enforcement. Today, the IRS is the world’s most powerful collection agency.
The IRS uses a computerized Information Returns Program (IRP), which matches information documents against the tax returns you have filed. Should their computer search fail to find a return, the IRS will begin their Taxpayer Delinquency Investigation (TDI).
We strongly advise that you do not attempt to wait out the IRS. Ultimately, they will find out if you owe back taxes. Plus, the longer you wait, the larger your tax debt will grow. Resolve your tax debt as soon as possible.
Owing Back State Taxes
Owing back state taxes is more complicated than owing to the Federal Government.
Forty-three states have a state income tax. State income tax codes differ from federal law and between states. These differences can be anywhere from minor to significant. The States can also charge sales taxes, unlike the federal government.
How Do You End Up Owing the State?
Taxpayers end up in tax debt to State Governments because, commonly, they do not have enough withholdings or deductions. These taxpayers have more income that needs to be taxed, causing a build-up of unpaid taxes.
Not keeping track of changes in one’s taxable income or tax status is also linked to an outstanding balance with the State Government. Additionally, taxpayers who earn income in multiple States sometimes forget to file several returns.
Owing Back State Taxes Is More Complicated Than Owing the IRS
It is more challenging to obtain a resolution with The State compared to the IRS. The discrepancy is because the Federal Government forces the IRS to offer tax relief options to delinquent taxpayers.
However, the same rules do not apply to the individual states, which require their residents to pay income tax. Also, consider that the IRS handles people from all 50 states, while a single State is only concerned with its population. An individual State has the luxury to pursue harsher compromise tactics.
Usually, a State only wants taxpayers to pay their tax debt in full. Most tax resolutions with the States are installment agreements and rarely offers in compromise. If you owe state taxes and need help, contact a tax professional.
What Happens If You Owe Back Taxes?
Owing the IRS back taxes is not without penalties. There are various methods and consequences that the IRS uses against taxpayers who do not repay their back taxes.
Assessment of Interest and Penalties
A tax debt balance compounds over time due to interest and penalties. It is not unusual for these additional charges to total as much as 50% of the original tax liability.
Interest – The IRS considers a back tax balance to be the equivalent of a loan from them, so they end up charging interest on the tax amount due. The interest rate, which changes every three months, is calculated by taking the federal short-term rate and adding 3%.
Penalties – A failure-to-pay penalty is assessed at the rate of 0.25% to 1% of the back tax amount due for each month that there is an unpaid balance. The maximum amount that this penalty can reach is 25% of the original tax amount owed.
The IRS uses compounding interest to ‘encourage’ taxpayers who owe back taxes to pay off their debt promptly. Compound interest is the interest on an outstanding tax liability calculated based on the initial principal amount and the accumulated interest.
Often, taxpayers will let their debt sit idle for years, unaware that it is steadily growing in the background. To put compounded interest into preceptive, consider this example:
A taxpayer owes $10,000 in back taxes to the IRS…
- In 1 year, the IRS will have added over $600 to the total debt.
- In 3 years, the IRS will have added at least $2,000 to the total debt.
- In 5 years, the IRS will have added more than $3,500 to the total debt.
Enforced Collection Activities
The IRS begins their back tax collection process with passive techniques such as issuing an IRS letter or an IRS Notice. However, the longer the tax bill is left unpaid, the more aggressive the collection methods will become. Eventually, the IRS may file a tax lien, issue a tax levy, or initiate a wage garnishment.
Liens – A tax lien is a method the IRS uses to ensure that they collect by holding an ownership stake against one or more of a taxpayer’s assets. The IRS can place a lien on a bank account, a property, or any other asset of significant value.
Levies – A levy is the actual seizure of a taxpayer’s property to satisfy a tax debt. The IRS can levy physical assets, bank accounts, retirement accounts, dividends, wages, and many other assets. A levy is one of the final steps the IRS will deploy in its attempt to collect from those who owe back taxes. Usually, it is exercised as a last resort after all other collection attempts have failed.
Wage Garnishment – A wage garnishment is an aggressive collection technique used by the IRS to collect back taxes. When the agency issues a wage garnishment, it directs the delinquent taxpayer’s employer to deduct a predetermined amount from each paycheck and forward that amount to them, the IRS.
In summary, here are a few key points you can take away from the information above:
- Back taxes are unpaid taxes that need to be rectified.
- Back taxes can lead to interest and retributions and usually have deadlines attached to them.
- Negligence of your back taxes can lead to wage garnishment, tax liens, levies, or even criminal charges.
Need Back Taxes Help?
If you have back taxes, please call one of our experts at 833-419-RISE(7473). They can guide you through our process and get you financially stable again.
For additional tax relief information and current news, check out our site blog or follow us on social media for more content!
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