What are Back Taxes?

Taxpayers can owe back taxes at the Federal, State, or even Local levels. Likewise, you can owe both personal and business tax liability.

Back tax, also called tax debt, is subject to interest, which accumulates at a constant rate. Even if you have not received a notice from the IRS, your back taxes will gain interest over time, and you could be stuck paying a hefty fee on top of the amount you already owe.

In our economic climate, owing the IRS back taxes is not uncommon, just as taxpayers ignoring their tax debt is not uncommon. However, if you owe back taxes, do not overlook your overdue tax liability – the consequences can be severe.

Once you know you owe back taxes to the IRS, you may be curious to find out what your options are.

To prevent yourself from being overwhelmed with interest rates and penalties, or having your tax refund withheld by the IRS in the future, you must work to completely repay your taxes as soon as possible. The potential means of payment varies depending on how much you owe and how much you can pay.

If You Can Afford to Pay Your Back Taxes in Full

There are several payment options available, including paying your back taxes in full as soon as possible, which may help limit additional penalties, although interest will continue to accrue until the balance is paid. You can pay your tax balance online through the IRS website, which links to a secure payment portal. Taxpayers can also use a debit or credit card to pay back taxes, but should be aware that processing fees may apply.

If You Cannot Pay In Full

The IRS appreciates your efforts to pay taxes, even if they are past due. One viable option is to apply for an IRS back tax relief program, but the qualifications to get approved can be difficult to navigate without the help of a professional tax representative, who can negotiate with the IRS on your behalf.

If you owe taxes, help may be available in the form of various IRS repayment programs offered through the Fresh Start Program.

The IRS Fresh Start Initiative provides access to a number of different programs to repay their outstanding balance. Some programs may provide temporary relief from certain collection actions, depending on eligibility. 

Depending on what program you qualify for, you can enter into a payment plan, reduce or remove penalties, or pursue a settlement option such as an Offer in Compromise, a tax settlement to settle tax debt. There are four main programs available to taxpayers through the Fresh Start Program:

IRS Payment Plan: Installment Agreement

An Installment Agreement is an IRS 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 the debt is paid in full. The IRS cannot send letters or impose penalties against you while on an installment plan. However, the IRS can continue to apply interest to your overall tax liability.

Offer in Compromise (OIC): Manage Your Tax Debt

An Offer in Compromise 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 offer this option to 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 Currently Non-Collectible Status if they cannot pay their back taxes at the present moment, but may be able to in the future. While this status does not necessarily remove tax debt, and does not last indefinitely, it does stop all collection activities for the agreed-upon time period. Such activity may include bank levies, wage garnishments, tax liens, and threatening letters from the IRS.

Penalty Abatement if You Owe Taxes

Penalty Abatement allows a taxpayer to have a tax penalty reduced or completely wiped out. The IRS will only apply Penalty Abatement if the taxpayer is able to claim reasonable cause, and the IRS will request sufficient evidence to prove this cause. Proper documentation is the best form of evidence to secure a successful Penalty Abatement.

As mentioned above, sometimes resolving tax debt is as easy as writing a check, but sometimes addressing your Back Tax debt is more complicated. We strongly encourage those struggling with significant tax debt to pursue one of the IRS Fresh Start programs; however, keep in mind that few applications for tax relief programs get accepted. The low rate of acceptance is often due to the IRS’s stringent and confusing criteria.

For this reason, a taxpayer who owes Back Taxes may reach the best outcome by contacting a tax professional. A tax expert can support you in communicating with the IRS and help you determine which option offers the most effective resolution for your specific set of circumstances.

TaxRise can provide a Free Tax Consultation to analyze your financial situation and explore your options for resolving your back taxes.

The Taxpayer Bill of Rights secures the right of taxpayers to retain an authorized representative of their choice when dealing with the IRS.

The IRS prefers to work with tax professionals, because it makes their job easier. This means professional tax representatives will often have a much better chance at negotiating a favorable outcome for a case. Tax experts also know the ins and outs of resolving tax debt; because they are familiar with the tax code, your representative will know what to do if you owe Back Taxes.

Tax professionals bring their experience, insight, and resources to your case. An expert can examine your situation and come up with an ideal strategy, and can skillfully communicate with the IRS.

With the support of a tax professional, the time commitment required to solve your Back Taxes 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. You will be able to continue working, taking care of your family, and attending to other necessary matters without considerable interruption from the IRS.

When you are considering whether to solve your tax problems alone or hire a tax professional to assist you in resolving your Back Taxes, it’s important to consider 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 seeking an installment agreement with the IRS on your own. Should you get audited by the IRS but have all your documents, files, and records in order, and can easily verify everything on your returns, you won’t need a tax professional.

However, without representation, you run the risk of saying something factually inaccurate, filling out forms incorrectly, misplacing necessary records, or getting talked into a less-than-ideal tax resolution.

Owing money to your friend is one thing, but owing Back Taxes to the IRS is another matter entirely. While it is unlikely that government agents will come to knock on your door or email you at your place of work, 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 to avoid the stress of frequent contact by the IRS is to pay your Back Taxes as soon as possible.

One of the primary 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 as beginning a new job, marriage, divorce, gaining new dependents, or your children aging out of dependent status. 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. An early withdrawal from your 401(k) can also lead to tax debt. 

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.

Each year, the Federal government claims it loses millions of dollars in tax revenue due to unpaid taxes. To compensate for their losses, the government decided to allocate 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 and begin issuing notices like LT38, CP14, and so on. The longer you wait, the larger your tax debt will grow, so it is best to resolve your tax debt as soon as possible.

Owing Back Taxes to the State government is more complicated than owing to the Federal government.

Forty-three states have a State income tax, and State income tax codes differ between States, as well as from Federal tax laws. These differences can be minor or significant. States can also charge sales taxes, unlike the Federal government. 

Taxpayers commonly end up in tax debt to State governments because 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. Additionally, taxpayers who earn income in multiple states sometimes forget to file several returns. Not keeping track of changes in one’s taxable income or tax status is also linked to an outstanding balance with the State government.