According to Benjamin Franklin, “The only thing for certain in life is death and taxes.” So like millions of working Americans, you try your best to pay your fair share and do it on time.
But what would happen if you found out when you filed your annual tax return that you owed the government more? Would you be prepared to pay, or would you find yourself without sufficient funds to meet your tax debt? Or what if the IRS audits your return and increases your tax liability. In 2015 alone, the IRS audited 1.4 million taxpayers and increased their tax liability by $7.4 billion (source)?
Owing back taxes to the IRS
Back taxes used to describe unfiled IRS tax returns. It meant the taxpayer owed additional taxes to the federal government. Today the IRS refers to this unpaid debt as “delinquent IRS tax debt.” Regardless of what you call it, back taxes can quickly get out of control.
- Notify you of impending action and demand you pay your taxes
- Once they do, the IRS may: Impose significant penalties and interest on your current tax debt
- Begin collection actions such as tax liens, tax levies, and wage garnishments
- File a substitute return on your behalf, which may overstate your tax debt
The minute you fail to file your tax returns, the IRS assesses a penalty, which includes a failure to file fee, failure to pay penalty, and interest on the unpaid taxes.
Instead of trying to hide the fact that you owe the IRS back taxes, you have options. You can:
- Contact the IRS to make payment arrangements
- Seek the assistance of a licensed tax professional
- Look for help from a tax settlement company
You have alternatives
Before you run and hide, hoping the IRS doesn’t notice that you owe back taxes, know there are other actions you can take.
Unfortunately, for many people – especially those who owe multiple years of back taxes – the idea of dealing with the IRS directly is frightening. However, the IRS offers options for taxpayers who file their returns but cannot pay the full amount they owe. The IRS Fresh Start includes a set of tax debt relief programs that are designed to help taxpayers out of debt. These programs include:
- Installment payments. If you owe less than $25,000 in back taxes, the IRS may be willing to arrange for you to repay your debt in monthly installments.
- Partial payment installment. For taxpayers who don’t qualify for installment payments, the IRS may arrange to have you pay lower installments over a longer period of time.
- Offer in compromise (OIC). With an offer in compromise, the IRS agrees to accept less than what you owe. It is generally reserved for those who have no hope of ever paying their back taxes in full.
- Currently not collectible. This is a temporarily assigned status when someone cannot pay due to a temporary hardship. Don’t be fooled – you still will have to pay your taxes once you resolve your temporary hardship.
What is the next step
The IRS has changed in the last few years. The new tax debt relief programs are a unique opportunity for people with back taxes. It doesn’t mean the IRS has gone soft. In 2015, the IRS filed 535,600 tax liens and had a 96% conviction rate on tax investigations (source). Of the people who were convicted, 80% received jail time.
It is smart to get proper representation when you deal with the IRS. It’s not only smart. Tax representation is your right when dealing with the most powerful debt collection agency in the world. Find a tax debt relief firm that employs tax attorneys and enrolled agents to represent your case. A professional tax relief firm can help you understand your tax situation. They can help you prepare unfiled tax returns, guide you through an audit, and negotiate a tax settlement or installment agreement.
However, you choose to proceed, don’t let back taxes put your life on hold. Review your options and take action to eliminate your IRS debt.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.