What are Back Taxes?
Back taxes are taxes that were owed in a prior year but not paid in full, or not filed at all. They can be federal, state, or local, and they grow over time because the IRS and states add penalties and interest until the balance is paid. The sooner back taxes are addressed, the more options are usually available.
The world of taxes is complicated and can be overwhelming for anyone or any business that is not well-educated about taxes. No matter who you are though, taxes have to be paid on the money that you make or if you are a business owner, the money that your business makes. If you do not stay on top of your finances, it can become easy to fall behind or for tasks to fall between the cracks. This may include not paying your taxes on time which can feel very scary if you find yourself in this situation. If you are in a situation where you owe taxes from a previous year, those are called back taxes. Get in contact with a team of professionals such as Cooper Norman to help you navigate the next steps and get in good standing with taxes again.
Back Taxes Definition
Back taxes, in simple terms, are unpaid taxes that an individual or entity owes to the government. These taxes can be from federal, state, or local sources and may include income taxes, property taxes, and even business-related taxes. When you fail to pay the required taxes by the due date, they become back taxes.
How Do Back Taxes Happen?
Back taxes can accrue for various reasons. One common way is through non-payment, which occurs when individuals neglect to pay their tax bills or fail to file a tax return, resulting in owed back taxes. Underreporting is another cause, as inaccuracies in tax return information can lead to discrepancies and underreported taxes. Tax audits conducted by tax authorities can also uncover errors or discrepancies in tax reporting, ultimately resulting in additional taxes owed. Additionally, failing to file tax returns for one or more years can lead to the accumulation of back taxes, making it crucial to address these tax obligations promptly.
Consequences of Back Taxes
- Liens and Levies- A lien can be placed on your assets or they may levy your bank accounts or wages in order to collect the taxes that are owed.
- Penalties and Interest- Governments may charge interest and penalties on the taxes that are owed which just increases the amount of debt that needs to be paid.
- Legal Action- In extreme cases, legal action may be taken that could lead to property seizures and wage garnishments.
How to Resolve Back Taxes
There are a few steps that can be taken to start the process of getting your back taxes taken care of. Firstly, if you have unfiled tax returns, it’s crucial to begin by filing them. This is the initial step in the process, and although you may still owe back taxes, filing the returns is essential to establish accurate records with the tax authorities. Many tax authorities offer the option to negotiate a payment plan or installment agreement, allowing you to pay off your back taxes gradually. It is a great idea to look for professional help to guide you through the process, particularly when dealing with substantial debt or legal actions. In some cases, you might be eligible for an Offer in Compromise, which presents an opportunity to settle your tax debt for less than the full amount owed, providing a potential path to financial relief.
No matter the amount that you owe in back taxes, it is a scary and stressful situation to be in. The sooner you start taking the necessary steps to pay your back taxes, the sooner you can find relief in having them paid. Call us with any questions that you may have and we are happy to help you the best way that we can!
What happens if you owe back taxes?
The IRS generally sends a series of notices before taking stronger action. If the balance stays unpaid, penalties and interest continue to build. Over time the IRS can file a federal tax lien, which affects credit and the ability to sell property, and it can eventually levy bank accounts or wages. Most of these steps come with written notice first, which is why opening IRS mail matters.
Penalties vs. interest
There are two main penalties. The failure-to-file penalty applies when a return is late. The failure-to-pay penalty applies when the tax is filed but not paid. Failure to file is usually the larger of the two, so filing on time still helps even if you cannot pay the full amount. Interest is charged on top of both and keeps running until the balance is paid.
Options for resolving back taxes
- File every missing return. The IRS usually requires all required returns to be filed before it will agree to a payment option.
- Payment plan. An installment agreement lets you pay the balance over time.
- Penalty relief. Some taxpayers qualify to have penalties reduced or removed, for example for a clean prior record or reasonable cause.
- Offer in compromise. In limited cases, the IRS accepts less than the full amount when paying in full is not realistic.
- Currently not collectible status. If paying would cause real financial hardship, collection can be paused.
Back taxes for business owners
For business owners, back taxes often include payroll taxes. Unpaid payroll withholding is treated seriously, because the IRS can hold responsible individuals personally liable for the withheld portion. If a business is behind on payroll taxes, it is worth getting help quickly.
Frequently asked questions
What does back taxes mean?
Back taxes are taxes from a previous year that were not paid in full or not filed. Penalties and interest are usually added until the balance is resolved.
How far back can the IRS collect back taxes?
In general, the IRS has ten years from the date a tax is assessed to collect it, though certain actions can pause or extend that period.
Should I file even if I cannot pay?
Usually yes. The penalty for not filing is typically larger than the penalty for not paying, and filing opens up payment options.
Can a CPA help with back taxes?
Yes. A CPA can prepare missing returns, review IRS notices, and help you choose between a payment plan, penalty relief, or another option.
Behind on a return or a balance? Talk with Cooper Norman’s tax team.