Unfiled tax returns and unpaid taxes can add up to trouble. Like most people, you probably don’t relish preparing your annual income tax returns. But what happens if you don’t file your taxes? The simple answer is that you will incur back taxes — and eventually, you’ll need to deal with them.
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What Are Back Taxes?
Back taxes are taxes that aren’t paid by the tax filing deadline, which causes you to be delinquent in the eyes of the IRS. Back taxes can be unintentional, meaning that you made a mistake in your calculations or took a deduction you weren’t entitled to, which resulted in you owing more tax than you calculated when you filed your return. Back taxes can also be intentional, meaning that you purposely paid less tax than you owed or that you didn’t declare all of your income.
If you are married and you believe only your spouse should be liable for the back taxes you owe, you might be eligible for innocent spouse relief. You could also be eligible for this if you are divorced from your spouse. You will need to complete IRS Form 8857, Request for Innocent Spouse Relief, explaining why you feel you are not responsible for the taxes incurred.
Regardless of the reason, it’s important to pay your back taxes. When you’re delinquent, take control of your situation by protecting your rights and coming up with a plan. A tax professional can be a valuable resource in helping you file your tax return in a timely and affordable manner.
No matter what your excuse is, you must file and pay your taxes to avoid further penalties from the IRS. Here are 11 tips for dealing with back taxes:
1. Understand the Process
Receiving a letter from the IRS might be your first clue that you owe back taxes. The letter should tell you how much you owe from specific tax years and when the payment is due. If you can, pay that bill in full by the due date. Once you do that, you will have satisfied your obligation to the IRS — at least until the next time your taxes are due.
2. Get Help From a Licensed Tax Professional
Receiving a notice from the IRS would raise anyone’s blood pressure. Before you jump into action, contact a qualified tax professional for delinquent tax help. “You are entitled to tax representation in any matter with the IRS, and you should never try to handle any tax issues without proper representation,” said Michael Raanan, MBA, enrolled agent, owner of Landmark Tax Group and a former IRS agent.
Reach out to the IRS and a tax professional immediately if the IRS has already started contacting you to collect. “You can ask the IRS to briefly halt any collection activities until you have secured tax representation,” Raanan said. “Do not hesitate to do so, as a long delay will only make things worse.”
3. Understand Your Rights and Options
Although you shouldn’t delay tackling your tax problems, you need to know your legal rights before taking action. “Do not let the IRS intimidate you into thinking you have no option but to immediately pay the amount of your back taxes in full,” Raanan said. “IRS agents can be quite threatening, so it is important you remain calm and collected and understand your options.”
A licensed tax professional can help you understand your rights and teach you how to file back taxes. You might have more possibilities and payment options than you think.
4. File Every Tax Return Even If You Can’t Pay
No matter why you’re delayed, file your past-due tax returns as soon as possible. A late tax return can be expensive: The failure-to-file penalty can be 10 times as much as the penalty for failing to pay.
“The penalty for late filing is 5% of the unpaid taxes for each month that the tax return is late,” said Josh Zimmelman, owner of Westwood Tax & Consulting, a New York-based accounting firm. “The penalty for late payment is 0.5% of your unpaid taxes for each month that the payment is late.”
Each day you wait to initiate your tax filing and pay what’s owed, the worse your problem will become. Make sure you file in a timely manner so that the penalties don’t skyrocket. You can file back tax returns anytime, so don’t assume that too much time has elapsed and you no longer have to file.
5. Request an Extension
Individual taxpayers might get an extension to file tax returns by up to six months — or longer if you’re located overseas. To request an extension, file Form 4868, which extends the filing deadline but not the payment deadline.
You might not be liable for the failure-to-pay tax penalty if you pay at least 90% of the amount due by the tax deadline. But this relief only applies if you pay the outstanding balance by your extension date. Otherwise, you’ll owe interest extending back to the original due date.
6. Set Up an Installment Agreement
The IRS might be willing to set up a monthly payment agreement if you owe less than $50,000 in combined tax, penalties and interest, and you’ve filed all your required returns. Short-term installment agreements might be available for balances up to $100,000.
Use the IRS online payment application to find out whether an installment agreement is available for your situation.
If you successfully set up a monthly payment agreement, make sure you stick to your repayment schedule. “In the event that you miss a required IRS deadline, it has the right to revoke the payment arrangement and restart the collection process,” Raanan said.
While you are under an installment agreement, any IRS tax refund that might be due to you in future years won’t be sent to you — instead, it will be credited to the outstanding balance on your installment agreement.
7. Pay by Credit Card
Although you don’t want to increase your personal debt in addition to your taxes due, you can choose to make a payment by credit card to help take care of your tax bill.
“Even though you might end up paying interest charges on your credit card balance, depending on your (credit card interest) rate, that might still be cheaper than paying the IRS’ fines and interest charges,” Zimmelman said.
Taxes paid by credit card go through a commercial payment processor, not the IRS, and will incur an added fee that might be tax-deductible. Check the IRS’ website for a list of processors.
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8. Make an Offer in Compromise
As a last option, you might be able to negotiate with the IRS. “If you can prove that you cannot afford to pay your taxes, the IRS may be willing to make a compromise and reduce your balance,” Zimmelman said.
The IRS will consider your entire financial situation, including your income, expenses, assets and ability to pay. You might be approved for a lump sum or periodic payments. In either case, you must have filed all required returns unless you have an extension for the current tax year.
Check out the IRS’ online offer-in-compromise pre-qualifier tool to see if you might be eligible.
9. Communicate and Keep Records
To ensure the delivery of your communications, send everything to the IRS via certified mail with a return receipt. It will show that you sent your tax return and someone at the IRS signed for it.
Make sure a postal employee postmarks your receipt if you opt to use certified mail. The date of the receipt will serve as the postmark date. Again, keep your receipt for proof of delivery.
10. Don’t Dig a Deeper Hole
Don’t let history repeat itself by missing the yearly tax deadline and digging an even deeper hole of tax penalties and debt. Also, don’t make the mistake of thinking you shouldn’t file the current year’s taxes because you failed to file last year. The IRS will hold you responsible for each delinquent tax return.
Most importantly, never ignore the IRS: “If you do not take heed to any letters or calls you may be receiving from the IRS in an attempt to collect back taxes, it could lead to serious consequences such as bank levies, tax liens and wage garnishments,” Raanan said.
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11. Resolve Your Tax Issues Now
Tax returns serve a variety of purposes: You might need them to apply for student financial aid, a mortgage or a personal or business loan. In addition, your Social Security, disability and Medicare benefits are based on your reported earnings.
Fortunately, you have options when your delinquent taxes become a problem or if you’re facing a tax audit. Tax information is tricky, however, and the repercussions for failing to file or pay can be substantial — so act quickly.
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Karen Doyle contributed to the reporting for this article.