Back taxes refer to taxes from a prior year that were either fully or partially unpaid. The failure to pay could be intentional, for example, if a taxpayer didn’t have enough money to pay their bill and filed a return without payment. Or a taxpayer sometimes has unintentionally failed to pay a portion of their taxes due to a mathematical error on their return or a reporting oversight, such as forgetting to report unemployment income.
Unfiled returns can also result in back taxes. When a taxpayer fails to file a return, the IRS will often compute their income from third-party documentation, such as 1099s submitted by banks or W-2s filed by employers. The IRS will then send the taxpayer a notice requesting the estimated amount be paid.
Regardless of the reason or amount, back taxes are as much an unpaid debt to the IRS as any other tax liability and accrue interest and penalties. The failure-to-pay penalty is 0.5% of unpaid taxes each month the tax remains unpaid. Interest also accrues from the first date a tax liability is unpaid until the date it is paid in full. The interest rate is equal to the federal short-term rate plus 3%.
Unfiled Tax Returns
If you have failed to file a return, the IRS will also assess a failure-to-file penalty. This penalty is steeper than the failure-to-pay penalty and is usually 5% of taxes owed each month. Even if you cannot pay your taxes on time, it’s always best to file your return in order to avoid this penalty.
If you have unfiled returns, remember when you decide to file you will need a different form for each specific year you failed to file a return. Forms and schedules are updated each year and you cannot file a 2019 return on a 2020 form, for example.
If you realize you forgot to report income or made a mistake that resulted in an underpayment in your tax liability, you can file a form 1040X Amended Return. The form will ask for the originally reported figures, updated amounts, and the difference. You should calculate and pay any additional tax as soon as possible, but do not try to compute penalties or interest. The IRS will do so and send you a bill.
How to Pay Back Taxes
The IRS will pursue your unpaid taxes. Once it determines you owe back taxes, the agency will start sending you notices and bills. If you ignore these, it can eventually place a lien on your property or garnish your wages.
Do not ignore the IRS. Even if you disagree with the agency, respond to notices within the designated response period and follow the procedures for challenging your tax debt.
If you cannot pay your back taxes, it’s best to contact the agency and try to arrange for a payment plan or even a discount to your overall liability if your financial situation warrants such. Here are some options:
- Short-term payment plan – if you can pay your back taxes within 180 days, you can apply for a short-term payment plan. You will need to fully pay your taxes as well as penalties and interest within this period. Note, short-term payment plans are usually 120 days but the IRS extended these to 180 days in its pandemic relief plan.
- Long-term payment plans – these are also called installment agreements and can be paid off in monthly installments over 72 months. Interest and penalties will continue to accrue until your entire balance is paid, so it’s best to pay as much as possible as soon as possible.
- Offers in compromise (OIC) – this is a discount to your overall tax liability. The IRS uses discretion in determining which taxpayers qualify. Taxpayers submit an offer for a reduced liability. The agency then reviews the taxpayer’s income, expenses, assets, and debts to determine whether the taxpayer is unable to pay in full and if the agency will accept the OIC. If the IRS accepts your OIC, you will have to make monthly payments.
Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer
If you owe back taxes or haven’t filed your returns, the experienced attorneys at Wiggam & Geer can help. Our lawyers can evaluate your situation, recommend a course of action, and assist you in the process. Contact Metro Atlanta’s top tax attorney’s by clicking here or giving us a call at (404) 609-1300.