Tax Blog

What You Need to Know About Back Taxes

Back taxes consist of any taxes (whether federal, state, or local) that are not paid off when they come due. Usually, back taxes are from a prior year, and they accumulate fines and interest until the full amount is paid.

For federal back taxes, the Internal Revenue Service (IRS) will charge you penalties. The total penalty will be levied in addition to both the tax due and the interest on the past due tax. If you don’t file on time, your penalties will usually equal 5 percent of the tax owed for each month (or part of the month) that your return is late up to five months (25 percent). If you go beyond 60 days, the minimum late penalty is the smaller of $100 or 100 percent of the tax owed.

If you file on time, but you don’t pay everything that is due, then you’ll be slapped with a late payment penalty of .5% of the tax owed for each month that the tax remains unpaid. There is no upper limit here, so the debt can continue to multiply over time.

The agency may even hold the refunds that you’re entitled to as well as file a return on your behalf without any deductions or credits in your favor (known as a substitute of return).

Options for Resolving Back Taxes

The good news is that there are ways to gain control over your back taxes. Whether you have many or one return to file, you should start taking measures to get back in good standing with the agency right away.
Here’s what you need to do.

1. Consider an Installment Agreement

Those who owe back taxes can set up an installment agreement with the IRS. The nature of the agreement will depend on your situation, including the figure you owe and how soon you can pay in full. Because the IRS offers up to 120 days to defaulters to pay their full back tax balance, you shouldn’t set up an installment agreement if you can pay the full tax within that period.

For the installment agreement, you’ll need to fill out Form 9465 or Form 13844 if you’re a low-income applicant. The IRS doesn’t require you to submit financial statements for agreements of $50,000 or less. By setting up an installment agreement, you’ll reduce the penalty on unpaid balance to 0.25 percent each month until the balance is paid in full. Keep in mind that the IRS has full authority to void the installment agreement if you fail to settle the balance on schedule.

2. Make an OIC (Offer in Compromise)

You may be able to find some relief for back tax payments via “Offer in Compromise.” With an OIC, you pay a certain portion of what you owe in back taxes in return for a discharge on the outstanding balance. The IRS may accept your offer in compromise if you absolutely can’t settle your debt or if doing so will put you under financial hardship.

It’s worth mentioning that the agency will conduct a thorough review of your financial situation. With full disclosure of finances, the IRS determines if it can reasonably expect you to settle the debt in full. If not, then they can accept your OIC. The revised balance needs to be paid within two years of the OIC agreement. Feel free to use the Offer in Compromise Pre-Qualifier online feature to determine if this could be an option for you.

However, you should explore other avenues before filing an Offer in Compromise because the IRS accepts fewer than half the applicants.

3. Apply for a Penalty Abatement

If you have a compelling reason why you didn’t pay what you owed in taxes last year (or the year before that), you can request penalty abatement. While this won’t reduce the balance you owe, it reduces the penalty applied to those back taxes. If your application is accepted, the IRS will either eliminate or minimize the penalties.

However, the applicant must prove he or she had reasonable cause not to settle or file the tax on time. Unfortunately, not earning enough does not count. You need to experience a major event, like a death in the family or a natural disaster to qualify.

4. Request to Be Placed Under “Currently Not Collectible” Status

If you can’t meet your day-to-day expenses and taxes within reason, you can ask the IRS to put you under what’s known as “Currently Not Collectible” status. When you apply, the agency will ask you to fill out a statement that proves that your financial situation is as bad as you say it is. You’ll have to provide details about your monthly expenses and income in the application.

If accepted, the IRS will put your account under the CNC status, which means it won’t collect back taxes from you until your financial situation gets better. However, it will still evaluate the penalties and interest to your account and may hold your refunds and apply them to your outstanding payments. The most important thing to note here is that a Currently Not Collectible status is a temporary way to get relief, as the IRS can review your income annually to see if you’ve regained the capacity to pay back your debt.

If you Think You Can Pay

Now you know some of the best ways to get relief until you are in a better place financially. However, if you have the capacity to pay your back taxes in full at any point, this is always the best option. Follow these steps to do so immediately:

1. Organize your tax documents: Find the 1099 forms or W2s you received to report your income for those outstanding tax years. These can be requested from the IRS or the institution that sent them to you.
Note: If you can’t find any of your tax documents from the past 10 years, you can file a request for a copy by completing Form 4506-T, Request for Transcript of Tax Return.

2. Download Tax Forms for Previous Years: Search the IRS website for prior year tax forms and download all the relevant ones. It’s important to locate those old forms because you should always file your back taxes on the form that corresponds with each outstanding tax year you are filing.

3. Complete Your Returns: Make sure to follow the instructions for the same tax year as the return you are preparing.

4. Submit the Forms: Make a submission to the address mentioned on Form 1040.

While all of this looks simple on paper, the IRS tax code is vast, and laws change on an annual basis. Following the wrong instructions or committing errors may require you to prepare the return for back taxes over again.

The best way to prevent any mishaps is to work with an expert. Contact our tax relief attorneys at The Tax Defenders for a free consultation about the best way to resolve your tax debt.