Filing Back Taxes With the IRS - Get Your Business Caught Up

  • Accracy
  • 26th Nov, 2023

People fail to file and pay their tax returns on time for many reasons: because they suspect or aren't sure if they owe taxes for a specific tax year, because their bookkeeping is a mess, or simply because they're afraid of the whole process and would rather avoid it.

Filing Back Taxes With the IRS - Get Your Business Caught Up
Tax Tips

Taxes that haven't been paid when they are due are called "back taxes," and they can be a huge headache. If you owe back taxes, the Internal Revenue Service can do things like:

  • Penalize you
  • Charge additional interest
  • Withhold any tax refunds you might be entitled to
  • File a return for you
  • Seize your assets
  • Ask the State Department to prevent you from renewing your passport

Owing back taxes to the IRS is serious, and the sooner you get them filed and paid, the better. And remember: just because you've managed to put off filing your taxes for a few years doesn't mean you're off the hook. The IRS can legally collect tax debts that are up to 10 years old, which means that it always pays to file a late tax return and pay down your tax debt.

 

When do taxes become back taxes?

Every year, you need to file a tax return and pay any taxes you owe based on that return. Even if you suspect you might not owe taxes for this year, you still need to file: it's the law.

Even if you need more time to file, you should still pay your taxes by the deadline. That's because fines are based on the amount you owe the IRS. Paid taxes = no fines for you.

Simply estimate your tax bill and pay through the IRS payment portal. Easier said than done. Here's our guide to calculating estimated taxes.

If you have the funds, here are the 7 ways to pay, and get rid of back taxes

If you're able to pay the full amount, you can pay online using a bank account, debit card, credit card, or digital wallet service like PayPal. Payments by check or online payments from your bank account using IRS Direct Pay are fee-free. Additional processing fees apply if you pay by credit card, debit card, or digital wallet.

Businesses or individuals with an account on the Electronic Federal Tax Payment System (EFTPS) can make payments through that system with a bank account as well.

Online payments with IRS Direct Pay using a bank account are the best option for most payers due to convenience and cost. Direct Pay is down for maintenance daily from 11:45 p.m. to midnight Eastern Time. It remains offline from 11:45 p.m. until 7:00 a.m. on Sundays. You should be able to make a payment during regular business hours anywhere in the United States.

What if I don't have the full amount to pay late taxes?

If you don't have the cash on hand to pay your full tax bill, try for a partial payment. It'll reduce the penalties and interest that accumulate.

Another option is to pay using a credit card—in some cases, the credit card interest works out to less than the IRS fines.

Finally, the IRS offers ways to pay in installments. Although there might be set-up fees, a payment plan can help you map out how you'll pay your outstanding balance. Your exact steps may vary depending on how you file your taxes and structure your business.

If you owe less than $100,000, you may qualify for a short-term payment plan where you make installment payments over a period of 180 days or fewer. If you owe $50,000 or less, you may qualify for a long-term payment plan. For most people, the best way to apply is online. Additional fees are charged if you apply by phone, mail, or in person.

For a short-term payment plan, there is no setup fee. For a long-term payment plan, there's a setup fee of $31 if you apply online, or $107 if you apply over the phone, by mail, or in person—unless you qualify for a low-income waiver.

If you opt for automatic monthly withdrawals, known as a Direct Debit Installment Agreement, you qualify for the lower $31 setup fee. This option is required for payment plans with a balance over $25,000. If you choose to pay monthly without automated direct debit payments, you will have to pay the higher $107 setup fee.

Interest and penalties continue to accrue in either case until the balance is paid in full under all payment plans. That means you'll owe less if you're able to pay sooner rather than later.

If you get into a payment plan and want to revise it, you can do so for a $10 fee. The interest rate for late taxes changes over time based on market interest rates. Most individuals or businesses pay between 1.5 percent and 6 percent interest.

Businesses have very similar processes and fees, but the application process varies slightly depending on the person or entity you're representing.

Meanwhile, tax resolution, also sometimes called tax settlement, is the process of resolving any debts you owe to the IRS—because you were hit with a penalty, because you have unpaid taxes, because the IRS levied your assets, or for any other reason.

A good tax expert—usually an enrolled agent, a CPA, or a tax attorney—can help you appeal an audit or a fine, resolve payment and collection issues, and negotiate a debt settlement with the IRS. They can also help you negotiate an installment agreement, which is a payment plan that allows you to repay your debts over time.

If you're in particularly dire straits, they might, in some rare cases, even be able to reduce your debts altogether through an offer in compromise. Use the IRS's online OIC Pre-Qualifier tool to see whether you may be eligible for one right now. You can find step-by-step instructions for submitting an OIC on the IRS website.

Just be sure to look out for OIC scams. Scammy tax preparation shops tend to pop up during tax season, and many of the claims that these disreputable companies make—that they can "negotiate" away fines or even erase your debt altogether—are misrepresentations.

 

I want to pay my back taxes but I need an extension. Do I qualify?

If you know you will file late, you can complete Form 4868 to request an extension. You don't need to give any reason for why you're filing late—if you complete this form, you get an automatic extension until October 15 to file your taxes without the late-filing penalty.

However, keep in mind that even if you receive the extension, you're still required to make tax payments on time—in other words, if you know you're going to owe taxes, you still are required to pay what you owe (or an estimate) by the standard deadline. If you don't, you may incur other penalties.

If you're a business owner who's required to make quarterly estimated tax payments, you should still make your estimated tax payments on schedule regardless of your extension request.

It's important to note that regardless of whether you're granted the extension or not, you'll still owe all your taxes, plus interest. Interest can add up fast, particularly on large balances, so don't delay paying what you expect to owe if you're able.

If your tax software doesn't calculate this automatically, the IRS will do the honors and tell you their estimate of how much you owe via an official letter through regular U.S. mail.

If you didn't request an extension or filed your extension request late, you will most likely owe penalties plus interest if you owe taxes. The IRS charges as much as 10 times more to late filers who don't complete the form for an automatic extension

The IRS penalties for tardiness are the following:

Filing your taxes late

For every month past the filing due date (or your extension date), you'll be fined 5% of your unpaid taxes. These fines max out at 25% of your total tax bill.

If you file more than 60 days late, the minimum penalty is $435 (or, if you owe less than $435, the fine is 100% of your owed amount).

Paying your taxes late

If you don't pay your owed tax on time, you'll be fined 0.50% of your unpaid taxes per month, also up to a maximum of 25% of your tax bill.

The good news: the two fines don't stack. If you're late to both file and to pay, you'll only be charged the 5% late filing penalty.

Don't forget the interest

In addition to the fines, the IRS also charges interest on unpaid taxes. Interest accumulates from the day after the deadline until your bill is fully paid off. It compounds daily—which means it can add up quickly. You can find the current interest rate on the IRS website.

Will back taxes ever expire?

There's technically no limit to the number of years for which you can file back taxes. However, there are stipulations, regulations, and processes in place that tend to prevent most taxpayers from getting more than a few years behind without being well aware that they owe the IRS money.

The IRS charges taxpayers a failure to file penalty and a failure to pay a penalty totaling 5% every month your tax return is late. This fee is capped at a total maximum tax penalty of 25%, however, so the total fees do not grow indefinitely.

If you haven't filed taxes for several years, the IRS may decide to settle your tax bill by setting up a levy on your wages or bank account. This can result in a garnishment of wages or other income.

The IRS may also file a notice of a federal tax lien, which can impact your financial options in the future. A tax lien by the IRS can limit your ability to take out loans or use your credit. A lien can also limit your sale of property or assets, as the government will now have a say in your transaction and will take the tax payment owed from the proceeds of any sale.

In an absolute worst-case scenario, the IRS can punish those who have been willfully avoiding filing taxes with up to five years in prison and up to $250,000 in fines for tax evasion.

Consequences in other areas

There are many other reasons you can run into issues by not filing taxes. In addition to missing out on possible tax refunds, there are several areas of your life that require you to present your recent income tax returns. If you haven't filed your taxes recently, you won't have any tax returns to present!

You may be asked to show your recent tax returns when you apply for a passport, for example. You will almost certainly be asked for tax returns when you apply for a mortgage, rent or other loan. You may also be asked for your recent tax returns when you apply for health insurance.

Your own or your child's financial aid applications for college require your most recent federal income tax returns as well. Finally, your retirement benefits, like Social Security and Medicare, are tied to the income reported on your tax returns. Failing to file your tax return for many years can jeopardize your future income.

How to get professional help with back taxes

If you're ready to take on missing tax returns, you may need some help checking your prior years of bookkeeping, updating income and expenses, and double-checking that you're not paying more than you must. The Accracy Retro team is experienced at sorting out the financials and finding tax professionals to help you file the missing returns, as well.

 
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