If you didn't have enough money withheld for taxes or failed to complete a tax return in the previous year, you may owe back taxes. You do, however, have options. Learn why you can have past-due taxes, what happens if you don't pay, and how to deal with them effectively.
Back Taxes: Definitions and Examples
Back taxes are taxes that were not paid when they were due, usually from a previous year. Back taxes can be owed at the federal, state, or local level, and they might be owed for various reasons. Many people owe back taxes because not enough money was deducted from their paychecks for taxes during the year. Some persons may owe money because they were unaware that most unemployment benefits are taxed, and that money was not immediately withheld. If you profit from stock or other investments, you may owe capital gains taxes, which you must disclose. You could also owe back taxes if you made a math error or purposefully under-reported your earnings. If you're self-employed or work as a freelancer and don't pay the employee's and employer's portion of Social Security and Medicare taxes, you could end up owing. 1 If they expect to owe at least $1,000 when they file their return, freelancers are expected to submit quarterly estimated tax payments. Neglecting to do so could result in fines.Back Taxes and How They Work
There's a distinction between not filing a tax return and owing back taxes. In general, the implications of owing back taxes are less severe if you file on time, so even if you can't pay your taxes in full, it's critical to file a return. The following are the penalties: Failure to file: You'll be charged interest and a 5% penalty for each month your return is late, up to 25% of your tax amount. Inability to pay: You'll be charged interest and a monthly late fee of 0.5 percent. If you don't file a tax return, the IRS can file a substitute return for you, which may or may not include credits and deductions that could reduce the amount of tax you owe. Suppose you submit a return but don't pay the due amount. In that case, it will issue you a bill demanding payment in full, and interest and late penalties will begin to accrue.Is it necessary for me to pay back taxes
Not everyone will incur back taxes even if they haven't filed a return. In reality, many people will discover that the IRS owes them a refund when they submit their taxes. If you had more taxes withheld than necessary, or if you qualify for certain tax benefits, such as the Earned Income Tax Credit, you may be eligible for a refund. If you owe overdue taxes, you must pay them according to the law. The IRS has ten years from the due date of your taxes to collect them. Some companies claim to be able to settle your tax debts for you. Still, only a tiny percentage of taxpayers will be eligible for the schemes they advertise. In reality, the Federal Trade Commission (FTC) advises that debt settlement organizations frequently result in people incurring even more debt. Working with the IRS is usually better when you can't pay your taxes. If you owe a tax refund or credit, you must file a return within three years of the due date to be eligible to receive it. When I Don't Pay My Back Taxes, What Happens Your tax amount will continue to grow each month until it is paid due to penalties and interest. The Treasury Offset Program will apply any future tax refunds you are eligible for to your back taxes. The repercussions might be considerably more severe if your tax bill becomes substantially delinquent. Delinquent taxes may cause your passport application to be rejected in specific cases. Your earnings or Social Security payments may be garnished, and the IRS may seize your bank accounts and other property. It can also place a tax lien on your property, allowing the government to take a percentage before you get paid if you sell it.How to Repay Taxes
If you owe back taxes, the first step is to file back tax returns. Yearly sending Form 4506-T, Request for Transcript of Tax Return, to the IRS, you can request tax papers from previous years, such as old W-2s and 1099s. Because tax regulations and forms might change yearly, find the IRS forms for the years you didn't file returns. When you've caught up on your tax returns, you can usually set up an IRS payment plan. If you can afford to pay off your entire balance within 180 days, you can enroll in a short-term plan for free. Otherwise, you can file for an IRS installment plan if you require more than 180 days to pay your debt. Interest and late fees will continue to accrue under both programs. Still, late fees will be charged at a lower rate of 0.25 percent per month rather than the standard 0.5 percent. If you complete your payments on time, the IRS will not pursue collection proceedings such as asset seizure or wage garnishment. You may have alternative options if you can't afford to pay anything toward your tax burden. You can ask that your account be reported as currently not collectible, which means that IRS collection attempts will be temporarily halted. You'll still be responsible for the tax obligation, plus interest and penalties for late payments. In rare cases, the IRS will accept an offer in compromise, in which you settle your debt for a lower sum than what you owe.Important Points to Remember
- Even if you can't afford to pay your taxes in full, it's critical that you file your tax return on time.
- Penalties and interest will continue to accrue until your back taxes are paid in full.
- Working with the IRS rather than a tax settlement agency is usually better if you owe taxes.
- If you can pay off your tax debt in less than 180 days, you can apply for a short-term payment plan; if you need more time, you can apply for a long-term installment plan.
Most Commonly Asked Questions (FAQs)
What is the deadline for filing back taxes The IRS, of course, expects you to pay all of your taxes. The IRS has ten years to collect your debt if you've filed a return. 13 You have three years from the due date of your return to claim any credits or refunds owed to you. Is it possible to have the IRS forgive your back taxes Yes, in a way. The IRS has a 10-year statute of limitations on collecting a tax debt from the assessment date. The assessment date is later than the due date for your return for that year or the date the return was submitted. Unless you've filed a fraudulent return, the IRS can't pursue you after the statute of limitations has expired. The statute is stopped or prolonged if you declare bankruptcy, leave the country, or apply for an offer in compromise. However, this does not imply that you can wait 10 years and start over with the IRS. Before the ten years are over, the IRS may place a lien on your property, seize it, or bring you to court. This could harm your credit and make the rest of your finances more challenging.