Back Taxes

What Are Back Taxes?

Back taxes are the taxes you owe to the Internal Revenue Service that was wholly or partially unpaid the year they were due. This type of tax debt regularly accrues penalties and fines, and in serious instances, individuals can face serious legal consequences when they owe back taxes.

The structure of society relies upon citizens paying income taxes for the money that they earn. Underreporting or underpaying your taxes, whether intentionally or unintentionally, causes hundreds of thousands of Americans every year to end up in debt to the Internal Revenue Service, or IRS. The IRS is the United States government organization responsible for enforcing tax laws and collecting taxes, including sending tax bills to delinquent taxpayers and placing tax liens on assets.

Here is everything you need to know about back taxes, tax collection, and the government-installed tax relief programs that can help people manage their tax debt.

Tax Debt and Back Taxes

When an individual files a tax return they are able to see how much they owe in taxes for the year, or contrarily, how much the government owes you in a tax refund if you have overpaid in taxes. Tax debt is accumulated when an individual fails to pay the tax balance presented on their federal income tax return by the filing due date. If you fail to pay what you owe in taxes, the IRS can place penalties and seek other options of securing payment for the tax debt you owe, so it is best to understand and pay your tax liability to avoid accumulating tax debt and back taxes.

Understanding the difference between tax liability and back taxes will help you when paying your tax bill. Here is a breakdown of the two similar tax terms:

Tax Liability

Tax liability is the total tax a person or company owes to the government for a given tax year. For both individuals and small businesses, the tax liability is owed to local, state, and federal governments, but normally when people refer to tax liability they are thinking of federal tax liability. The tax liability includes both the total tax an individual or business owes for the year as well as any tax debt or back taxes that have accumulated from prior years.

Back Taxes

Back taxes refer to the taxes an individual or company owes for a prior tax year. There are several reasons people can accumulate back taxes. There may be circumstances when people unintentionally or intentionally neglect to pay their taxes. Some of these instances include failing to report an income stream or the total amount of income earned during that year, filing a tax return without paying their tax liability, and neglecting to file a tax return.

Tax Bill

Typically when you file a tax return with the IRS you are able to view exactly how much you owe in taxes that year. Otherwise, a tax bill is an official form of documentation identifying how much a person owes in taxes. There are several reasons why you may receive a tax bill in the mail. Some of these reasons include:

While receiving an official letter from the IRS can be startling, your tax bill clearly informs you how much tax debt you have. Once you find out how much you owe in current tax liability and back taxes, you can move forward and file a tax return, or in the case that you cannot afford to pay your full balance, you can apply for IRS tax relief programs. It is important to pay your tax debt as diligently as possible because the IRS applies heavy fines and penalties for unpaid back taxes.

Consequences of Owing Back Taxes

Filing a tax return every year to pay your tax liability is the most efficient method of avoiding back taxes and the penalties of accumulating debt. If you owe back taxes, it is important to learn the consequences.

Failure-To-Pay Penalty for Unpaid Back Taxes

When people fail to file a tax return altogether, the IRS applies a failure-to-pay penalty to the account. This is the most common type of tax penalty that can be placed when someone does not pay their back taxes. The penalty for failing to pay your tax balance is an additional 0.5% of the amount due each month. This penalty is applied every month or part of the month either until the person makes a payment for the total tax balance due or until the penalty reaches 25% of the total tax owed.

Failure-To-File Penalty for Unpaid Back Taxes

Similar to the failure-to-pay penalty for unpaid back taxes, the penalty for failing to file a tax return is 0.5% each month, but instead of the penalty capping at 25%, the penalty of failing to file taxes will be applied until the total tax balance is paid or until the penalty reaches 10% of the total tax owed. In short, even if you cannot afford to pay your full tax balance, it is highly recommended to still file your tax return or request an extension to avoid this penalty.

Failure-To-Deposit Penalty for Unpaid Back Taxes

The failure-to-deposit penalty for back taxes varies depending on how late the payment is compared to the original payment due date. If the deposit is more than five days late there will be a penalty of 10% of the unpaid tax, and if the debtor owes more than $100,000, the penalty increases to 15%.

Interest Accumulation for Unpaid Back Taxes

Aside from the increasing debt accumulating from penalties, the IRS also charges interest on the unpaid amount. The interest rate is determined quarterly, and by the time the value has compounded, people can find that they now owe much more than they initially did in tax liability.

Tax Lien

One of the dangers of failing to pay taxes is receiving a tax lien from the government. Tax liens can be placed on the assets of a business or individual who fails to pay their tax debt as a means of guaranteeing the payment of a debt by seizing property or physical assets. Tax liens are typically thought of as a last resort to get people to pay back their taxes before the charges become more serious. This legal claim to your assets and properties is one of the last warnings you will receive for failing to file a tax return and pay your tax liability in full.

While tax liens are placed on an asset to assure payment of back taxes, receiving a tax lien does not automatically indicate the asset is being sold. Rather, this gives the tax authority the first claim to an individual’s assets or property over other creditors seeking to do the same. Additionally, tax liens ensure the individual cannot sell or refinance an asset a lien has been placed on until the tax liability has been paid in full or until the statute of limitations on the debt expires.

Paying your tax balance in full and on time is the best method to prevent receiving a tax lien from the government, but if you are struggling to pay your taxes, you can request help from the IRS to explore which payment plan options may be suitable for your financial situation.

Tax Levies

If a balance is owed to the IRS, they will send several notices of their intent to levy before taking action against the individual. While the tax liens secure the tax authority’s legal claim on an individual’s properties, tax levies actually permit the government to seize the assets. Once the IRS considers you a delinquent taxpayer with no intention of paying what is owed, they will attempt to settle the debt by going after your bank accounts, wages, or property. Sometimes the IRS will only claim a small portion of a taxpayer’s money to settle the debt, whereas other times a taxpayer’s entire savings account is taken and applied to their tax balance.

It is important to realize that while private creditors require a court order to levy a property, federal agencies like the internal revenue service do not.

The IRS has the full legal authority to place a tax levy and seize any asset you possess or have an interest in. Some of these include:

Immediate action must be taken to stop your assets from being seized. You must be able to prove you are experiencing financial hardship if you want to request to stop an IRS levy.

Wage Garnishment

Unresolved tax liabilities owed to the IRS may result in the garnishing of your wages. Wage garnishment is a different form of unpaid tax collection than levies because instead of taking money from the debtor’s bank account directly, a third party is involved. Wage garnishment is a method in which the IRS tries to collect payment from people who owe back taxes involving sending a notification to their employer requesting that a portion of their wages are sent directly to the government to be applied toward their unpaid taxes.

The employer has a legal obligation to send a percentage of their wages to be applied to all back taxes, including unpaid penalties and liabilities, and this can even affect your spouse as the wage garnishment will not differentiate between your take-home pay.

How To Pay Taxes

The financial burden of paying taxes can be challenging enough without the added build-up of back taxes and the penalties associated with tax debt. You can file a tax return from a previous year to pay your back taxes, but there are consequences for waiting too long.

If you file a tax return within three years, you can pay off your back taxes as well as potentially receive any tax refund you might have coming. If you file a tax return within three to six years, you can pay off your back taxes and be considered within good standing with the IRS, however, you will not be eligible to accept incoming tax refunds. If you file a tax return over six years late, you can still pay off your back taxes, however, by this point, you may not be considered within “good standing” with the IRS anymore.

Tax Relief

Although catching up on tax payments can be challenging, there are many government installed tax relief programs that assist people in paying taxes and managing their tax debt. If you find yourself in a situation where you cannot afford to pay your taxes or have accumulated back taxes, you can explore options the internal revenue service offer to help taxpayers mitigate their debt. Looking for tax relief? Make sure to check out our fresh start program.

IRS Payment Plan

The first method of tax relief offered by the IRS is a payment plan. IRS payment plans allow taxpayers to pay the back taxes they owe over a period of time, which will hopefully be more manageable financially. The IRS offers two main types of installment agreements: one short-term payment plan which constitutes a period under 120 days, and a long-term payment plan, which is for a period longer than 120 days. Payment plans are an excellent option for people who owe taxes but cannot afford to pay their full tax liability at the current time.

While an IRS payment plan can be a helpful tax payment strategy for those undergoing financial hardship, it is important to note that being approved for an installment agreement will not remove the penalties and interest applied to your account and that you will still be responsible for paying all accrued interest until your tax balance is zero. Another factor to consider is that if your debt exceeds $25,000, all payments toward your installment agreement must be automatically withdrawn from a bank account. Additionally, if you choose to make payments using a credit or debit card, you will be responsible for paying all fees associated with the card.

Offer in Compromise

Some taxpayers who owe back taxes can qualify for an IRS tax relief program known as an offer in compromise. An offer in compromise is an agreement between the taxpayer and the internal revenue service to settle their tax debts. While many people can qualify for an IRS installment agreement to make payment on their taxes over time, less than half of the total applicants the IRS receives for an offer in compromise are accepted.

There are several factors that can qualify you for an offer in compromise, but in general, you must prove to the IRS that you cannot afford to pay your back taxes or if paying your full tax debt will create financial hardship. Additionally, you must be up-to-date on filing all of your tax returns to be considered for an offer in compromise. When applying for an offer in compromise, once you have submitted your application, the IRS suspends all collection activities until they have reviewed and answered your submission, however, any federal tax liens the IRS has placed against you will remain until you have successfully settled your tax debt.

Currently Not Collectible Status

People with tax debt can sometimes qualify to have a “currently not collectible” status placed on their accounts by the internal revenue service. Very few people are considered eligible for this tax relief program, but if you are struggling to afford your living expenses and pay your tax debt, the IRS may temporarily flag your account as exempt from paying taxes. When applying for this delay in the collection of tax payments you will need to provide information about your monthly income, expenses, and debts for the IRS to evaluate.

If your account is approved to be listed as currently not collectible, the IRS may still review your income each year to see if your financial situation has improved or if your status should remain. Being listed as currently not collectible also does not make you immune to the IRS filing a tax lien against you, nor does it make your tax debt disappear, so it is beneficial to take advantage of the financial relief of delaying tax payments and prepare to make timely payments of your tax liability in the future.

Being in debt is stressful and scary, especially when you owe back taxes that are accruing penalties and interest as the tax liability continues to go unpaid. While there are many IRS-installed tax relief programs that can assist taxpayers in managing their unpaid taxes, if you are looking for direct help in resolving tax debt, consider consulting with us here at Ideal Tax to help you navigate the application processes and get your tax issues under control. You may qualify for the IRS tax debt forgiveness program.

Ideal Tax Solution Representation

Ideal Tax Solution has the experience and knowledge to handle the most serious of tax audits. Our expert Tax Attorneys and Enrolled Agents will negotiate with the IRS on your behalf and ensure that your taxpayer rights are protected and that the IRS auditor is playing on a level field. Call us today to discuss how we can develop a strategy that will allow you to address the audit and resolve it with better than acceptable results.
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