Whether you failed to pay your tax liability or did not file a tax return at all, you can accrue major penalties for not paying your back taxes that can put a major strain on you financially. Below is an overview of what back taxes are, what the consequences are for not paying them, and how to get help with paying them.
What Are Back Taxes?
Back taxes are taxes that have either been partially paid or not paid at all during the year they were due. They can either be federal, state and/or local taxes. There are a few reasons someone may have this problem, these reasons include:
- Failing to pay tax liability after filing their return
- Not reporting all earned income for a tax year
- Not filing a tax return
What Are the Consequences of Not Paying?
There is a multitude of consequences for not paying taxes. First, the IRS will charge a minimum fee of $135, if the amount remains unpaid it will accrue interest on the unpaid amount from 0.5% per month to 25%. The government may also get involved if taxes continue to go unpaid, the strategies they typically use include:
- Press charges
- Demand immediate payment
- Offer a disclosure program
- Seize property
- Seize assets
- Place liens on property
- Place a federal tax lien
A tax lien can stay on a credit report for up to 10 years. If a tax lien is placed on an individual, the IRS can seize the tax payer’s wages, assets, and financial accounts to collect up to the amount of taxes owed.
How Can I Get Help?
Currently Not Collectible Filing Status
If you are financially unable to pay back your taxes upfront, you may file for Currently Not Collectible (CNC) status with the IRS. They will review your financial situation. After reviewing your application, if you are approved, the IRS will stop attempting to collect debts from you. This means that they will not subject you to wage garnishment, liens, or levies.
This strategy is the most common way to pay back on back taxes. An installment agreement (AI), allows you to either pay one or more years of back taxes with monthly payments. You may negotiate with the IRS to set up a monthly payment you can afford. You can apply for an AI directly from the IRS website, but it is recommended to work with a debt resolution professional if you owe more than $10,000.
Offer in Compromise
An Offer in Compromise (OIC) is a debt tax settlement plan. With an OIC, you will pay back everything you owe by paying a portion of what you owe for a discharge of the remaining balance. The IRS will do a thorough evaluation of your finances to determine if you can pay the full amount. If they determine you can’t, then they will settle for an agreement.
A penalty abatement doesn’t reduce the amount of back taxes owed, but it reduces the number of penalties you will face. If you are approved for penalty abatement, the IRS can eliminate or reduce your penalties. To be approved for penalty abatement, you must be able to prove that you had a “reasonable cause” for not filing taxes. Examples of “reasonable causes” include natural disasters or a death in the family.
An innocent spouse is a spouse of someone who owes back taxes but did not know of it. You must be able to prove that your spouse filed for taxes without your knowledge, no knowledge of amount due, or inaccuracies in a joint tax return. If the IRS finds you to be an “innocent spouse”, then you will be given full forgiveness.