Falling behind on your taxes leaves you skirting around penalties, and no one particularly wants that. Back taxes often get missed for all kinds of reasons: a job change, financial hardship, major life transitions, or simply losing track of deadlines. Whatever your reason may have been, you need to take action if you have unfiled tax returns because the IRS doesn’t take it lightly. The good news is that you can do something about your back taxes.
The agency encourages taxpayers to file all past due tax returns, even if they’re not able to pay the full amount owed. In general, the IRS expects you to file your last six years of tax returns to be considered in good standing. Anything less than that potentially disqualifies you from available IRS offers and marks you as non-compliant. Older returns shouldn’t be disregarded either, as they could still trigger complications with the IRS. The idea is to file all missed tax returns so as to maintain compliance
Our tax attorneys at Victory Tax Lawyers bring over a decade worth of experience to every case we handle. Even if you don’t have enough money to pay up your back tax debts alongside filing your back taxes, we can show you how to set up a payment plan with the IRS to make your tax payment easier. Schedule a free attorney consultation with us today; let’s discuss your tax issue and help you find the appropriate solution immediately.
In this post, we’ll walk you through the process of filing for back taxes, including the timelines for filing, how to determine what you owe, and how to correctly file your past-due tax returns. We’ll also cover payment options and the potential consequences of not paying, so you have a clearer understanding of your tax responsibilities.
What Are Back Taxes?
Back taxes are simply taxes that were either not fully paid or completely unpaid in the year they were due. In essence, if taxpayers cannot pay their taxes for a year, they end up owing back taxes. People often end up owing back taxes for different reasons. Some of the most common reasons include filing a return without paying the full amount, underreporting income, especially when they earn from multiple sources, or making errors when claiming deductions or credits. Regardless of the reason, those unpaid taxes accumulate and end up becoming what the IRS calls “back taxes.”
A key concern when it comes to back taxes is that if you ignore them for long, they begin to rack up interest and penalties, leaving you with a much bigger tax bill to deal with. And that’s not all. The IRS takes unpaid taxes seriously and has a range of legal tools to recover what’s owed. The implication is that you may also face collection actions, or, in severe cases, legal charges.
How Many Years Can You File Back Taxes?
The IRS generally demands that taxpayers with delinquent returns file, at the very least, the past six years of tax returns for them to be in federal tax compliance. And by delinquent return, we simply mean a tax return that wasn’t filed by the deadline. Filing those six years is the IRS’s baseline for you to be considered in good standing with them. And being in good standing matters if you’re trying to qualify for things like a payment plan, an Offer in Compromise, or any of their other programs.
Now, if you’re due a tax refund, the rules are a little tighter. If you’re filing for a refund, you have only three years from the return due date or original filing deadline to claim it. You risk losing your refund if you don’t file your tax returns at all or if you do so after this three-year timeline. The same thing applies if you’re planning to claim tax credits such as the Earned Income Credit. You have to file all due returns, and you have to do so within the stipulated timeline; otherwise, the IRS can withhold your refunds or credits.
That said, here’s also something worth noting. The IRS can actually demand returns older than six years, and there are two reasons for this. First, there really is no statute of limitations on unfiled returns. This means that if you never filed, the IRS isn’t legally bound to stop at six years. They can, and most times will, go further back, especially if they suspect something serious like tax fraud or major underreporting or if you’ve had a history of noncompliance
Secondly, remember that the Collection Statute Expiration Date (CSED) allows the IRS to collect taxes owed up to 10 years from the date of tax assessment. And during that time, they’re allowed to go all out in terms of collection actions to recover what you owe. That is why we recommend that you file all missing returns, even if it’s been more than six years, to avoid issues with the IRS. Delaying gives the IRS substantial leverage, and reduces the probability of being able to settle your previous year’s taxes on your own terms.
Special Circumstances
There are certain cases where you may qualify for time extensions for filing your taxes. Two of the most common are military service and natural disasters. If you’re serving in a combat zone or participating in contingency operations, for instance, the IRS automatically gives you extra time to file past-due returns, pay any taxes owed, or respond to IRS notices.
Similarly, if you were a victim of a natural disaster, you may qualify for disaster relief. The IRS usually extends the tax deadlines of those who have suffered from natural disasters. In some cases, they even waive their penalties. If you fall into one of these categories or feel you have a valid case to justify your having overdue taxes, let your attorney know so they can guide you on obtaining whatever relief may be germane to your case.
How to Find Out How Much Back Tax You Owe
There are a few ways to ascertain how much tax debt you may have accumulated. If you’re unsure of how much you owe, here are some steps you can take to find out:
- Visit the IRS website and create an account or log in to your existing IRS account. This will show you the amount of taxes you owe, including penalties and interest, as well as your payment history for the last five years.
- You can request your income tax transcript from the IRS by filing Form 4506-T, “Request for Transcript of Tax Return.” Your tax returns transcript essentially provides a summary of your tax accounts. This request can easily be made online or by mail.
- Contact the IRS directly at their toll-free number to ask about your unpaid balance. The IRS will need you to verify your identity, so make sure you have details like your Social Security number, taxpayer identification number, and mailing address ready before placing the call.
- Review any letters or IRS notices you’ve received before for detailed information on your back taxes. These can easily be found in your email.
- If you’re not sure what to do or need assistance, then don’t hesitate to reach out to a tax professional. They can help you manage all communications with the IRS and get whatever information you require. They can also guide you through the entire process of resolving your back taxes.
How to File Your Back Taxes
If you owe back taxes to the IRS, it’s best to find out how to file back taxes as soon as possible to avoid further penalties and interest. The great thing is that it isn’t nearly as hard as it looks. Here’s a step-by-step guide to help you out:
1. Gather Necessary Financial and Tax Documents
The first step is to gather every necessary document relevant to the year or years you need to file. This includes your W-2s, 1099 forms, or any other record detailing your income from employment or other sources. Don’t forget to include information about deductions, credits, and refunds you’re eligible for, as they reduce your taxable income and impact your eventual tax liability.
2. Request Tax Documents From The IRS
Many people do not know this, but the IRS provides a form you can fill out if you need to request any of your tax information they have on file. This is useful to know, especially if you’re missing old tax documents. Maybe you lost your W-2, or perhaps you never even received your 1099s. You can request a wage and income transcript directly from the IRS. This is especially important if you’re trying to reconstruct your past returns.
The IRS will send you the information they have on record, including the information on the different forms. If you’re working with a tax professional, they can usually request those documents on your behalf with your consent.
3. Prepare Your Returns
After you’ve gathered the different relevant records, the next thing is to prepare your returns. This part can feel a little intimidating, especially if you’re filing for multiple years. Each year has its own tax forms and tax rules, so make sure you’re accessing the right tax return form relevant to the year(s) you’re filing.
When filing, you particularly want to make sure you’re calculating both what you owe and any potential tax refund due. This means taking into account your income, deductions, credits, withholdings, and any estimated tax payments made during each tax year. By now, you should already have with you your W-2s, 1099s, and any other documents showing your income from all sources. Next, you want to track down the documents showing the taxes you’ve already paid, such as through withholding or estimated payments. Make sure not to overlook relevant deductions and credits that apply to you, as they go a long way in reducing your tax liability.
If you’re not clear on how to prepare the tax returns or do not know the deductions you’re eligible for and should be claiming, consider working with a tax lawyer to guide you. Once you’ve completed your returns, submit them to the IRS. The IRS does not allow e-filing for prior years, so you will need to send paper copies of your returns. Be sure to use the correct mailing address for your state.
After filing, the IRS will review your returns and let you know if there are discrepancies or additional payments that need to be remitted. Keep an eye on any communications from the IRS so that you can respond to them quickly. If you owe a large amount in back taxes or penalties, you may qualify for the IRS Hardship Program, which basically are resolution options provided by the IRS to help taxpayers settle their tax debt more manageably.
Payment Options for Paying Your Back Taxes
If you’re unable to settle your you cannot pay your back taxes all at once, the IRS provides various resolution options to help make the burden easier:
1. Payment Plan
An IRS payment plan, also known as an installment agreement, is an arrangement with the IRS that allows you to settle your outstanding tax debt gradually through more manageable monthly payments. This can prove particularly helpful if you cannot afford to pay your tax debt at once. You can easily apply and set up your payment plan using the IRS’s Online Payment Agreement tool.
The IRS offers both a short-term and long-term payment plan. With a short-term payment plan, you are given an extra 180 days to pay your tax debt in full. The long-term plan is better suited for taxpayers who need more time to make payments. The duration and terms you’re given are often based on what you owe and your ability to pay. To be sure you get the best terms and avoid mistakes, be sure to consult with an IRS payment plan lawyer for professional guidance.
2. Offer in Compromise (OIC)
Taxpayers can also apply for an Offer in Compromise (OIC). With an OIC, the IRS allows you to settle your tax debt for less than the full amount of taxes owed. The IRS is quite rigid in its eligibility requirements for an OIC. They evaluate several things when considering whether or not to approve an offer.
For starters, only those passing through extreme financial hardship are considered, and that’s just the beginning of their screening process. They’ll assess your entire financial picture—things like income, expenses, assets, and your ability to pay. Then, they’ll assess your reason for making the application. There are three possible grounds for acceptance: doubt as to liability, doubt as to collectability, and effective tax administration. Then again, you must be current with all filing and payment requirements, including estimated taxes, and not be in an open bankruptcy proceeding.
The bottom line is that the agency will only approve your offer when it’s unlikely that they’d be able to collect your tax debt in full, and your offer represents the most they could reasonably expect to collect. If all of this feels a bit overwhelming, it’s easy to see why not many people end up qualifying after applying. This is why we never recommend applying for an OIC without the help of a tax lawyer. While it’s true that the IRS tends to reject most OIC submissions, we’ve had a nearly 100% success rate with our applications.
3. Request a “Currently Not Collectible” Status
If you’re facing economic hardship and are unable to keep up with your taxes and basic living expenses, you might be eligible to request what’s called Currently Not Collectible(CNC) status . What this does is pause the agency’s collection efforts temporarily because doing so would create more financial strain.
Bear in mind that your CNC status doesn’t automatically erase your tax debt; it only pauses the IRS’s efforts at collection. Essentially, the IRS cannot activate collection actions like liens, garnishments, levies, and the rest on account of your debt. The IRS will review your financial situation regularly, and once things improve, it may resume collection efforts, so it’s not a permanent fix. Plus, it does nothing for penalties and interest associated with your tax debt. Interests will continue to accrue as normal.
4. Penalty Abatement
While penalty abatement won’t erase your back taxes, it can help you reduce the penalties that accrue over time and make paying off your debt harder. If you have a reason for not filing, perhaps you were seriously ill, or maybe you encountered unforeseen hardship, you may qualify for penalty abatement. The IRS calls this “reasonable cause.” There’s also a provision known as First-Time Penalty Abatement, which you may qualify for if you’re a first-time offender.
That said, successfully getting those penalties removed is neither straightforward nor guaranteed. It’s a good idea to work with an experienced tax lawyer who can guide you through this process and let you know if you might qualify for this option.
What Happens If You Don’t File Back Taxes?
A lot of things go wrong when you don’t file your back taxes. When taxes go unpaid, the IRS doesn’t just forget about it. They begin to add interest and penalties to the outstanding amount. These can accumulate over time and significantly increase your tax bill.
Not paying back taxes can also attract a tax lien and/or a tax levy. A federal tax lien is a legal claim against your property as a way to guarantee that you pay up your tax debt. On the other hand, a levy actually takes the property to satisfy the debt. In the case of a levy, they can seize your property and bank accounts or garnish your wages.
Unpaid taxes, especially when they result in a lien, can be reported to credit bureaus. This can damage your credit score, impact your creditworthiness, and affect your ability to secure loans, mortgages, or other forms of credit. In extreme cases, neglecting your tax debt can lead to criminal charges, especially when it is interpreted as tax evasion. This can result in legal action, including fines and even imprisonment.
Top 7 Best Practices to Avoid Back Taxes
To avoid back taxes and stay in good standing with the IRS, it’s important to follow certain best practices. Following these seven best practices will help you avoid paying back taxes:
- Submit your federal income tax return by the deadline, regardless of whether you can pay the entire balance or not. If you can’t pay the full amount, pay as much as possible. If you need to, set up a payment plan with the IRS so that payments are easier and more manageable for you.
- Keep organized records of your income, expenses, deductions, and credits throughout the year. When your books are accurate and up to date, you’re less likely to make mistakes or miss out on important details.
- If you’re employed, review your tax withholdings to make sure they’re correct. If you’re self-employed or have other non-wage income, make sure you’re making quarterly estimated tax payments annually to avoid underpayment when you file taxes.
- If your tax situation is complex or you’re unsure about your obligations, work with a tax professional such as a tax attorney. Tax professionals can assist you in maintaining compliance and make sure you don’t overlook significant details.
- Use tax preparation software to be sure you’re accurate and avoid errors when filing. Most software will let you know if you have missing forms or potential mistakes before you submit your return.
- Each year brings potential changes to tax regulations. Make sure you’re regularly checking for updates and staying informed about regulations that impact your filing or payment obligations.
- If you experience major life changes, such as getting married, having a child, or starting a business, make sure you modify your tax planning accordingly. Events like these can affect your tax liability, which makes preparation essential.
Get Professional Assistance with Victory Tax Lawyers
Filing back taxes is a responsibility that should be addressed promptly to avoid legal complications and financial burdens. When left unaddressed, back taxes trigger additional penalties and accrued interest. There are several resolution options to help you manage your tax debt, including setting up an installment plan, applying for an Offer in Compromise, or requesting Currently Not Collectible (CNC) status if you’re eligible. The point is that repayment can be made less burdensome if you’re rightly informed. This is why the IRS doesn’t take excuses when people owe taxes, as they’ve provided options to ease the process.
If you need professional help with handling your back taxes, our experienced tax lawyers at Victory Tax Lawyers are here to help you through the entire process. We will guide and support you all the way and make the process as smooth as possible. We’ll also help you access available tax relief options unique to your tax situation to reduce the financial strain on you. Schedule a free consultation with us today. If you’d prefer to meet in person, find our office location here.
