What Are Back Taxes? How To Settle Issues With The IRS

Having the IRS come after you with a “past due” notice is never a good feeling. If you owe unpaid or overdue taxes, this can put you in a rather stressful situation – especially if you don’t have the means to pay them.

Fortunately, there are steps you can take to settle your past due balance without ever putting your assets or credit on the line.

In this guide, we’re covering what you need to know about back taxes and how to settle your tax issues with the IRS.

What Are Back Taxes?

Back taxes are taxes that were not completely paid when they were originally due. These are typically taxes owed from a previous year (or several years).

Unpaid taxes can be owed at the local, state, or federal level, and if left unpaid, can be turned over to private collection agencies. Taxpayers who have unpaid or past due taxes are at risk of losing their assets or damaging their credit score.

How Do I Know If I Have Back Taxes Due?

The IRS will typically send you a notice via mail notifying you can you have unpaid taxes due or that you have not yet filed your tax return.

The notice receive will depend on your circumstances, for example:

• The IRS has no record that you filed your prior personal tax return
• The IRS is holding your refund because you have not filed your tax return and could still owe tax
• The IRS is sending a final notice that you have not filed your tax return and may receive penalties
• The IRS has yet to receive your tax return and has calculated the tax and penalty fees that you owe
• The IRS will send you several notices before your case is handed over to a collection agency, or before any of the consequences below are issued.

What Are The Consequences Of Not Filing Back Taxes?

When you neglect to file a tax return and pay the tax that is due, you are essentially stealing money from the government. The IRS takes this seriously and there can be major consequences for not paying your taxes.

Wage Garnishment

The government may utilize a consequence called wage garnishment in order to collect money for your back taxes. This means that your employer will be legally required to withhold part of your wages and allocate it you paying off your unpaid taxes.

You are not at risk of termination if you only have 1 order for wage garnishment. You can, however, find yourself in a tough financial spot, as a portion of your wages is being seized to pay the IRS.

Fortunately, there are caps on the percentage of your wages that can be garnished. This varies by state. Learn more about wage garnishment here.

Tax Lien

A tax lien is typically obtained through a court order to put a claim on your assets for unpaid taxes. In this case, the government claims priority over other creditors to seize your assets if your tax debt remains unpaid.

This is NOT a notice that your property WILL be seized – only that IF you lose your property to the government, the money will go toward paying off your taxes before it goes to other creditors.

Read our post about Tax Liens here.

Bank Levy

A bank levy is a step up from wage garnishment, as the IRS can then demand that the bank itself places a hold on your funds in order to cover unpaid taxes. The government can even seize said funds to pay off your unpaid taxes. You have 21 days before the IRS can withdraw the money from your account.

This is one of the more severe consequences of owing back taxes, as your bank account can be frozen or completely cleaned out. We recommend paying your taxes or negotiating a payment plan before it gets to this step.

Property Seizure

The ultimate consequence of repeatedly not paying your taxes is that your assets can be seized by the government.

This property can include your home, car, boat, motorcycle, or other assets that can be sold to pay off your debt. The funds collected will be used to cover your taxes, but do not cover any money owed to private creditors.

Once your property is seized, there is little you can do to reclaim your assets. That’s why it is essential that you either pay off your taxes in full, negotiate a payment plan, or consult a tax professional before it gets to this stage.

Avoid A Worst Case Scenario

Don’t put your livelihood on the line. Get help sooner rather than later.

A tax relief company or tax professional will be able to explain your options and help you settle on a reasonable payment plan. They will also help you avoid penalties, fees, more debt, legal trouble, or even jail.

How Do I File Back Taxes?

It’s recommended that you start paying off your back taxes when your balance is as low as possible before you start accumulating fees and penalties. This will make it easier to pay down your debt in a shorter period of time. It will also help you avoid the consequences listed above.

If you owe a larger balance, it can take longer to pay this off. We recommend getting professional assistance if you are worried about not being able to afford your payments.

Work Out A Payment Plan

A back tax help professional can help you negotiate a payment plan with the IRS and/or private creditors. You may be able to pay over a longer period of time and avoid interest and penalties.

Once you agree on a payment plan, it will be easier for you to account for these payments in your budget.

File A Return With The Help Of A Tax Professional

Often the best way to resolve your balance with the IRS is to file your back taxes. This can be a complicated process, especially if you are filing multiple tax returns. That’s why we highly recommend working with a tax professional. They will help you get the maximum benefits in terms of credits and deductions.

File Your Return Yourself

It is not advisable to file back taxes yourself if you have limited tax experience. It can be done, but it is essential that you do your research and gain a thorough understanding of taxes and your unique situation.

Cover All Your Bases

You can use any program of your choice to prepare your tax return, but the late tax return itself will need to be filed on paper and mailed into your local IRS office. They cannot be electronically filed.

If you are filing multiple returns, use a separate envelope for each and send them via certified mail. This will ensure that your returns are delivered to the right destination. You will also receive confirmation if they are delivered or not.

If your deadline has passed, you may also deliver your return in person to your local IRS office. Take photocopies of each page and have the IRS stamp each copy. These will serve as a receipt of when and how you filed.

How Do I Get Help With Back Taxes If I Can't Pay What I Owe?

If you owe back taxes and can’t afford to pay your balance in full by the deadline, there are a few routes you can take.

First, be sure to respond to the notice as soon as possible in order to avoid any fees or penalties. If you are able to pay off a lump sum, this is even better. Either way, you should send a response to the IRS immediately.

IRS Payment Plans

The IRS offers several payment plans to make paying off your taxes more manageable. Here are your options:

• Payment Plan Installment Agreement
• Offer in Compromise
• Temporary Delay of Action

Payment Plan Installment Agreement

The IRS offers a variety of payment plans to taxpayers who can’t afford to pay off their balance right away. These are monthly payment plans that allow you to make payments over an extended period of time (typically 4-6 years).

If you owe $50,000 or less, they may be able to apply for an online payment agreement. Otherwise, you’ll have to make a request via a 9465 form.

Working with a tax professional will help you negotiate better terms with the IRS and/or collection agencies.

Offer in Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. - IRS.gov

In this case, you pay the amount and the IRS forgive the remaining balance.

The issue with this option is that you have to meet specific criteria in order to be eligible. It is typically reserved for those experiencing “extraordinary hardship”.

The IRS may accept an Offer in Compromise based on these reasons:

• Doubt as to liability. A compromise meets this criterion when there's a genuine dispute as to the existence or amount of the correct tax debt under the law.
• Doubt as to collectibility. This exists in any case where the taxpayer's assets and income are less than the full amount of tax liability.
• Effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances. Source.

If you can prove eligibility, an Offer of Compromise can provide massive relief.

Temporary Delay of Action

Rather than a payment plan, this is a delayment plan. Being approved for a Temporary Delay of Action means you can put off payment for a limited length of time.

Here, the IRS labels your debt is “not collectible” until your financial situation improves. This can buy you some time, but it does not reduce your debt amount.

Hire A Tax Professional

For any of the options above, we recommend working with a trusted tax professional. They will be able to thoroughly explain your options and help you settle on the right plan for you.

How To Avoid Tax Issues With The IRS

The best way to avoid tax issues with the IRS is to file your tax return and pay your taxes on time.

Here are our top tips for preventing a “past due” notice from the IRS.

Always File Your Return

File your tax return correctly and on time whenever possible. This will let you know how much you owe and when. Even if you owe the IRS tax but cannot pay right away, it’s important to file the return anyway to prevent penalties.

Be Proactive

Being proactive will help you avoid penalties, fees, and interest on your past due balance. It can take months for the IRS to send you to collections. The sooner you act, the better your chances are of avoiding major consequences like wage garnishment or seizure of your property.

Work Out An Installment Agreement

As stated earlier, you have a few options when it comes to paying your back taxes. Note that interest will still accrue if you have a payment plan. It’s best to work out a payment plan rather than waiting for your debt to go to collections, getting your wages garnished, or having your assets seized by the government. Explore your options as soon as possible.

Make Your Payments

If you are able to negotiate a payment plan, make your payments in the correct amount and on time. It’s better to slowly pay down your debt than to risk penalties or jail time.

Get Professional Help

A tax professional can be a huge help when it comes to negotiating a fair installment plan. Be sure to do your research to find a company or representative that understands the intricacies of IRS tax resolution and back tax payment plans.

Filing Your Tax Returns May Be The Fastest Way Out Of Tax Trouble

Don’t get that first “past due” notice in your mailbox.

Try your best to file your tax return correctly and on time. The more proactive you are, the better your chances are of avoiding tax trouble with the IRS.

If you do end up owing back taxes, respond to the notice immediately and seek a tax professional to help you explore your options. Your best bet is to find a legal solution to settling your issues with the IRS.

You Don’t Have To Go Through This Alone

Getting a notice of back taxes due can be daunting. But the best way to resolve your issues with the IRS is to be proactive.

Perhaps you have gotten your first notice from the IRS. This is your first chance to take action.

Or, maybe you feel overwhelmed by a mountain of notices and are facing wage garnishment or a bank levy already.

No matter your situation, there is help available.

Get Help Filing Your Past Due Tax Return

When it comes to back taxes, the one thing you shouldn’t do is do nothing.

If you don't take action, you can end up buried in a pile of fees and penalties.

If you’ve received a notice from the IRS, take action immediately. It’s not too late to seek debt relief help.

A reputable tax relief representative or tax relief company will help you navigate the process. They can even help you avoid higher penalties, wage garnishment, being issued a bank levy, and much more. And it is never too late to file your back taxes. You don’t have to go through this process alone. Learn more about your tax relief options here.

What happens if I owe back taxes?

If you owe back taxes to the IRS, you will likely be issued a notice from the IRS by mail. If you fail to pay your taxes, you can face additional consequences, such as fees and penalties, wage garnishment, tax lien, bank levy, or seizure of your assets.

Can I go to jail for back taxes?

If you reside in the US, you can't go to jail for simply owing back taxes. However, you can go to jail if you knowingly cheat on your taxes.

Does the IRS charge interest for back taxes?

Yes. The IRS charges 0.5% interest of the owed amount each month until the tax is paid in full. The rate will increase to 1% if the tax is still unpaid 10 days after the IRS issues a notice of a levy. The maximum penalty is is 25% of the tax due.

What is wage garnishment?

Wage garnishment is an order by the government to your employer to withhold a percentage of your wages to cover payment of your back taxes. Your employer is legally obligated to do this. However, you are not susceptible to termination if you only have 1 wage garnishment. Caps on wage garnishment percentages vary by state.

Will the government levy my bank account if I fail to make payments?

If you owe taxes and fail to make payments, the IRS can issue place a levy your bank account. This means that they can place a hold on your account or even withdraw money to pay off your debt.

Can the IRS take my property if I owe back taxes?

The government can place a tax lien on your property which gives them priority in the case that your property is seized or sold. This means that the funds will go to the government to pay off your debt before it goes to other debt collectors. Beyond that, it can get to a point where the government can legally seize your assets and sell them to pay off your tax debt.

I can’t afford to pay my taxes. What do I do?

If you can’t afford to pay your taxes in full right away, you can work to negotiate a payment plan with the IRS. You may also be eligible for other programs. Speak to the IRS directly or a tax professional to discuss your options.

Is there tax relief available?

The IRS provides a variety of tax relief programs. You can also work with a tax relief company to help you negotiate a payment plan and avoid fees.

About The Author

Minji Kim, LLM

Tax Attorney LLM at Anthem Tax Services

Minji Kim is currently a tax attorney at top rated tax resolution company Anthem Tax Services. With 10 years of experience practicing in tax law, Minji Kim has a Juris Doctor (JD) degree with a concentration in Taxation. After finishing her 1st year law school Taxation class, she become more interested in taxation, and she ended up signing up for a Joint Degree Program during Law School.

One year after getting her Juris Doctor Degree, Minji Kim received her Master of Laws (LL.M) degree in Tax Law. Minji was involved in numerous volunteer activities while in Law School. She particularly enjoyed being a VITA (Volunteer Income Tax Assistance) member, because she found it very interesting to see how an individual's tax numbers can change depending on different circumstances.

Minji enjoys assisting people in tax law strategy and improving their tax situation, and strives to help people understand better how taxes are involved in everyday life.

Articles by Minji Kim, LLM

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