IRS Back Taxes Explained: What You Need to Know
Dealing with back taxes can feel like a nightmare. You never filed tax returns for prior years. Or you failed to pay all the taxes owed. Either way, ignoring the issue won’t make it go away. The sooner you take action, the better. This guide will walk you through practical steps to resolve back taxes and get square with the IRS.
What triggers IRS back tax notices?
You’d get an IRS notice if you didn’t file returns or underpaid your income taxes for previous years. Specifically, signs of unpaid taxes include:
- Not filing a return by the due date
- Filing an incomplete or inaccurate return
- Failing to report all your income
- Underpaying estimated taxes
- Not paying taxes on time
Once the IRS flags your account, you’ll get a notice explaining the issue. Different notices cover distinct situations:
CP14 Notice: You underpaid your income tax for a particular year. It states the extra amount owed.
CP501 Notice: The IRS believes you failed to file a return and owe taxes. It estimates how much you owe.
CP504 Notice: Urgent notice that the IRS will levy your assets if you don’t pay your back taxes immediately.
No matter which notice you get, taking prompt action is critical.
What if you never got the original tax bill?
Some people swear they have not received the initial tax bill or notice. If this happens, contact the Taxpayer Advocate Service (TAS). This independent organization within the IRS works to resolve issues and disputes for taxpayers.
To make your case, gather evidence showing you didn’t get the notice. For instance, copies of old tax returns can prove you filed properly. Or records showing a past address change.
But suppose TAS investigates and finds the notice was valid. In that case, you’ll still need to address those back taxes—no sense delaying the inevitable.
Do you really owe back taxes? File back taxes
The most direct way to understand what you owe is to file income tax returns for the missing years. Yes, it’s a hassle. But once those prior year returns are processed, you’ll know what extra taxes you owe.
Filing past due tax returns also stops the “failure to file” penalties. Each month a return is late, this penalty equals 5% of the unpaid tax up to 25% maximum. Filing now prevents further penalties.
Plus, it gives you hard data to determine what deductions and credits you qualify for. This ultimately lowers the taxes owed. In short, file those past returns ASAP.
Pay back taxes in full to minimize costs
Pay off the entire back tax amount immediately. Why? Because penalties and interest keep accruing until your tax debt is paid off. The IRS charges 1/2% interest on unpaid taxes for each month or part of a month your payment is late plus other penalties.
Paying quickly avoids extra costs that keep ballooning your balance. Plus, it accelerates any tax refund you’re owed. By law, the IRS applies refunds to tax debts before issuing payments to you.
Bottom line? Paying back taxes in full is always the least expensive option. But that’s easier said than done…
Explore flexible IRS payment plans
Most people need help to fork over their entire back tax bill upfront. That’s why the IRS offers payment plans to pay gradually over time. Two standard options include:
Installment Agreement: Make monthly payments until your tax debt is paid off. However, penalties and interest continue accruing. And there’s a $225 user fee to set up the plan (or $107 for payments deducted from your bank account).
Offer in Compromise: Settles your tax debt for less than the total amount owed. To qualify, you must have a concrete hardship that the IRS accepts and meet strict eligibility criteria. But if approved, you pay a lump sum or monthly installments for less than you owe the IRS.
Before applying for either plan, file your delinquent tax returns. The IRS needs those processed first to calculate the exact amounts owed. Then, submit the proper forms and documentation proving you qualify. Payment plans provide flexibility when you can’t pay back taxes in full right now.
What if you can't afford to pay your tax debt at all?
Some taxpayers experiencing extreme financial hardship can qualify to delay collections for some time. You aren’t required to make payments during this temporary delay, and penalties stop accruing.
However, interest still accumulates on unpaid tax debts. So, your total tax liability grows larger by the end. A delay: press the pause button temporarily if you’re facing a crisis.
To postpone collections, submit detailed documentation of your financial situation. For instance, proof you can’t obtain housing, medical care, or food for basic living needs. The IRS will review it to determine if it’s severe enough for a delay.
Don't ignore IRS back tax notices
It’s tempting to toss those scary notices in the trash. But ignoring back taxes won’t make the issue disappear. On the contrary, the IRS can take aggressive collection actions, including:
- Wage garnishment – up to 100% of each paycheck
- Seizing funds from bank accounts
- Federal tax lien placed on your property
They will hunt you down eventually. So, take IRS letters seriously and comply. Otherwise, you risk having your paycheck and assets seized.
Get professional help resolving back taxes
Don’t go it alone, especially if you owe substantial amounts. Hire a tax relief company or CPA for personalized guidance. Here are some key benefits:
- Help file your back taxes properly and get the fastest refunds
- Negotiate payment plans or settlements with the IRS
- Ensure you pay only what’s actually owed
- Prevent further penalties and interest
- Resolve any errors quickly
Dealing with back taxes is daunting. But the sooner you take action, the easier it gets. Follow these steps and work with an experienced tax professional to regain peace of mind.