The Definitive Guide to Back Taxes

Everything you need to know about back taxes

You have heard the Benjamin Frankin quote about taxes and death. “The only thing for certain in life is death and taxes.” Like millions of working Americans, you try your best to pay your fair share and do so on time. Unfortunately, life can get complicated. In 2020 alone, the IRS counted 13.2 million delinquent taxpayer accounts and collected nearly $1.9 billion in back taxes.

So what can you do if you owe the IRS more than you can pay? It is important to have a clear understanding of your tax situation and any back taxes you owe so you can take a proactive approach to resolve the issue.

What are back taxes?

Back taxes are taxes that were not paid in full when they were due. Taxpayers can have federal, state, and local back taxes. The trouble with back taxes is they grow because you have to pay interest and penalties until they are repaid. The good news is there are tax relief programs that can help you repay back taxes.

Why you should file back taxes?

One of the most common causes of back taxes is not filing a tax return for one or more years and hoping the IRS will not realize it. However, you should always file your tax returns if you are required by law to do so, even if you can’t afford to pay the taxes you owe at that moment.

Here are four good reasons to file back taxes.

  1. Avoid interest and penalties. Filing old tax returns can limit the interest charges and late payment penalties the IRS can charge you.
  2. Claim a Refund. Sometimes taxpayers fail to file tax returns on years they are actually owed a refund. If you are due a refund for withholding or estimated taxes, you must file your return to claim it within 3 years of the return due date. The same applies to claiming tax credits, such as the Earned Income Credit.
  3. Protect your Social Security Benefits. If you are self-employed and do not file your federal income tax return, any self-employment income you earned will not be reported to the Social Security Administration. This means you will not receive credits toward Social Security retirement or disability benefits.
  4. Avoid issues with loan applications. Loan approvals are often delayed if you can’t provide proof of filed tax returns. For example, mortgage lenders will not consider home loan applications from borrowers who don’t provide evidence they have filed recent tax returns. The same goes if you want to apply for a mortgage refinance, a business loan, or apply for federal aid for higher education.

How to file back taxes?

Even if you don’t have the money to pay your back taxes, it’s important to file back tax returns. However, it can be a challenge if years have gone by and you don’t have the paperwork or data to fill in your return.

Here is a five-step guide to filing back taxes:

  • Get your paperwork. If you are an employee, this will mean your W-2s. Self-employed workers will need 1099 forms and invoices. You will also need to find receipts or other supporting documents if you are claiming deductions or credits.
  • Ask the IRS for any missing tax documentation. If you don’t have the necessary W-2s and 1099s, you can ask the IRS for tax documents for the last 10 years using Form 4506-T, Request for Transcript of Tax Return.
  • Find the tax forms for the year you are filing. Don’t use a 2021 Form to file a 2019 tax return. The IRS provides the tax forms of prior years here. However, if you are using tax software, such as TurboTax, this is automatically done.
  • Complete the tax return. Don’t forget to fill in the form using the instructions for that year, not the current year’s instructions.
  • Submit your tax returns. Once you have filed all your missing tax returns, the IRS will send a notice with your total tax penalty and interest charges.

You can deal with the IRS directly or use a tax relief company to help you through the process. If you owe more than $10,000 and don’t have a good understanding of tax law, you may benefit from having a tax relief expert on your side. Here is a list of tax relief companies that can help you with back taxes and past-due tax returns.

Tax returns and Al Capone

When gauging the severity of unpaid taxes or an unfiled income tax return, it helps to have some perspective. You might not think that a missing payment is a big cause for concern. Al Capone evaded authorities and committed terrible crimes, but failure to pay taxes was his undoing. Tax evasion, not murder or dozens of other crimes, landed him in prison.

Aside from criminal charges that could lead to jail time, your assets become at risk when you owe back taxes. The IRS can place liens against your properties, issue levies, and apply other penalties related to unpaid back taxes. These actions harm both your credit score and financial standing. Unpaid back taxes put your assets, including property and bank accounts, at risk. Make sure you submit your tax filing completely and before the due date. Then take the necessary steps to resolve any unpaid balance as quickly as possible.

Another critical detail is that even if you request an extension to file your return, you start accruing penalties and interest immediately after the due date. To avoid the fee, make your payment on time.

The IRS has vast resources to collect tax debts. So it’s best not to ignore IRS letters and notices. Find out how to get out of tax debt and avoid the IRS tactics to collect on delinquent taxpayers.

File your prior-year tax return

You can contact the IRS directly for information regarding how to file prior tax year returns, or you can contact a tax professional. Your federal tax returns must be filed before proceeding with any available tax relief options. If you have missed a tax year filing, it is essential to file an income tax return to avoid the IRS processing a substitute return. Substitute returns will not likely reflect your eligible deductions, which would increase your unpaid tax bill due.

Owing back taxes to the IRS

Back taxes reflect your failure to file and pay the full amount on your tax returns. As such, you as a taxpayer owe 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. If you find yourself in arrears on your taxes, there are few actions the IRS will take to start the process of collecting what you still owe:

      • Notify you of impending action and demand you pay your taxes
      • 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 tax return on your behalf, which may overstate your tax debt
      • Apply for any future tax refunds as payment on your past-due taxes

The minute you fail to file your tax returns on time and in full, the penalties and interest start to accrue. The IRS assesses penalties, including a failure to file fee, a failure to pay the penalty fee, and interest on your unpaid taxes.

Instead of trying to hide the fact that you owe the IRS back taxes, you have options. You can:

What if you can’t afford to pay your back taxes

Hoping the IRS doesn’t notice that you owe back taxes is not a sound strategy. You have options for actions to take to address the issue.

If you cannot pay what you owe immediately, you can request an additional 60-120 days to pay your account in full through the IRS’s Online Payment Agreement application. No user fee will be charged. If you need more time to pay, you can request an installment agreement, or you may qualify for an offer in compromise.

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 payment options for taxpayers who file their returns but cannot pay the total balance they owe. The IRS Fresh Start program includes a set of tax debt relief options designed to help taxpayers out of debt. Let’s take a closer look at a few of these offerings.

Installment agreement

An installment agreement allows you to pay your tax debts over an approved period of time. There are two types of installment agreements.

      • 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 more extended period of time.

Offer in Compromise

With an Offer in Compromise, the IRS agrees to accept less than what you owe. This option is generally reserved for those who have no hope of ever paying their back taxes in full. The IRS accepts the Offer in Compromise under specific guidelines with documents verifying or attesting to your inability to pay the balance. The three general qualifiers for an Offer in Compromise are:

      1. You can’t afford the full amount. Based on your financial information, available assets, and circumstances, the IRS accepts that you can’t pay the entire tax debt before the 10-year statute of limitations ends.
      2. Economic hardship. You can prove that paying the total amount would cause you economic hardship.
      3. Doubt over what you owe. There is doubt over whether you owe the tax or about the accuracy of the balance owed.

There are few things to keep in mind if you seek an Offer in Compromise. To qualify, you must:

      • File all required income tax returns.
      • Be up-to-date with estimated tax payments (self-employed individuals and business owners).
      • Be current with federal tax deposits (businesses with employees).
      • Not be in an open bankruptcy proceeding.

Currently not collectible

Currently not collectible (CNC) is a temporarily assigned status when someone cannot pay their taxes due to a temporary hardship. But don’t be fooled. You still will have to pay your taxes once you resolve your temporary hardship and have the funds to do so.

If you qualify as CNC, the IRS will delay federal tax collection activities while you’re under the protection of CNC status. This removes any levies on your wages or bank accounts without requiring a payment agreement.

Under the IRS tax statute of limitations, the IRS has 10 years from the date you first owed back taxes to collect the taxes, interest, and penalties. If your CNC status lasts beyond the 10-year mark, the tax bill disappears.

Before you get excited at the prospect of not paying your taxes and penalties, you need to know all the information on CNC status. Income increases or other financial changes may alter your CNC status eligibility. If this occurs before the 10-year statute of limitations ends, you will owe your unpaid taxes, interest, and penalties.

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. This doesn’t mean that the IRS has gone soft. In 2020, the IRS filed 543,604 tax liens and had an 81 percent conviction rate on tax investigations. So, it is wise to get proper representation when you deal with the IRS.

Tax representation is your right when dealing with the most powerful debt collection agency in the world. The best tax relief firms have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates. A professional tax relief firm can help you understand your tax situation. They can also help you prepare unfiled tax returns, guide you through an audit, negotiate a tax settlement, installment agreement, assist with an offer in compromise, or obtain currently not collectible status.

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.