Paying Tax Debts and Back Taxes
Options for resolving unpaid tax bills with the IRS
By Andra DelMonico, J.D. | Reviewed by Canaan Suitt, J.D. | Last updated on July 30, 2024 Featuring practical insights from contributing attorney David S. De JongUse these links to jump to different sections:
- What Are Back Taxes?
- How Do I Know if I Owe the IRS Back Taxes?
- How Does the IRS Collect Back Taxes?
- How Long Do I Have to Pay Tax Debts?
- Does the IRS Offer Payment Plans or Accept Settlements for Tax Debts?
- How Can a Tax Attorney Help with Back Taxes?
- Find Experienced Legal Help
While everyone hopes to get a tax refund after filing their taxes, sometimes people owe money instead. Ideally, they will pay their tax debts within the same tax year that they come due. Otherwise, the Internal Revenue Service (IRS) will deem the debt owed and consider them back taxes. If you owe current or back taxes, paying them will help avoid more aggressive collection practices by the IRS.
What Are Back Taxes?
When you file your annual tax return, you may find that you owe a tax debt. That is the tax due for the current year. Once the current year passes, any unpaid taxes become back taxes. A taxpayer could have a tax liability for the current year and also owe back taxes.
There are several reasons why someone would owe back taxes. It could be the inability to pay the debt, an error on their tax return, insufficient tax payments, an unfiled tax return, or the result of an audit. Whatever the reason, paying tax debts and back taxes helps to avoid more significant tax issues.
Failing to pay back taxes can result in the IRS taking more extreme action and more significant financial issues that can have a lasting impact.
How Do I Know if I Owe the IRS Back Taxes?
If you owe income taxes, the IRS will send a letter outlining the amount due. The letter will also outline how long the taxpayer has to respond and methods for appealing the debt if the taxpayer disagrees with the amount owed.
These IRS notices are always sent through the mail. The IRS will never call, text, or message Americans through social media. Any attempts to collect made through these channels are scams and should not be considered legitimate IRS communication. If a taxpayer loses their letter or wants to verify what they owe, they can do so by looking into the IRS.gov website.
Additional communications are done through the mail. This will include the acceptance of a requested payment plan, late payments, or the completion of the debt payment. “You can get a copy of IRS transcripts to show what returns are not on their system and how much the IRS believes that you owe. You can do it yourself, or you can do it with the assistance of a tax professional,” says David S. De Jong, a tax attorney at Stein Sperling Bennett De Jong Driscoll in Rockville, Maryland.
How Does the IRS Collect Back Taxes?
If a taxpayer fails to pay their back taxes, the IRS will pursue debt collection in various ways. The IRS could offset the dent you owe with future tax refunds. As you file future taxes, instead of receiving your refund, the IRS will credit the amount toward your debt.
Another collection method the IRS may use is to file a Notice of Federal Tax Lien. Once the lien is in place, the IRS cannot remove it until the taxpayer pays the debt in full or the IRS can no longer collect on the debt. The notice of the lien can also appear on your credit reporting, impacting your credit rating and ability to obtain a loan in the future.
A third method of collection the IRS can use is to serve a Notice of Levy on your assets. The IRs can seize and sell your assets, crediting the proceeds to your tax debt. This can include physical assets like real estate, boats, or vehicles. It can also levy nontangible assets, such as wages, bank accounts, social security benefits, and retirement income.
De Jong explains the general process the IRS follows when collecting owed taxes. “They’re going to send letters that increase in the severity of tone, and the next-to-last letter they send is a collection due process (CDP) notice. That is the notice that after 30 days have passed since the date on the notice, the IRS can begin seizing assets unless you file an appeal where you suggest how it should be handled other than by seizure.”
How Long Do I Have to Pay Tax Debts?
Ideally, taxpayers should pay their tax debt in the year it comes due. However, if they have back taxes to pay, it can take longer than a year to pay. The longer the taxpayer takes to pay the debt, the more they will pay. Penalties and interest will accrue, increasing the full amount the taxpayer must pay.
If taxpayers need more time to pay, they can request a payment plan from the IRS. There are short and long term plans that are up to 72 months. Once approved, the taxpayer will make monthly payments towards their debt. There is also the option of requesting that collection activities be put on hold due to financial hardship. The IRS will put the debt in a currently not collectible status.
Does the IRS Offer Payment Plans or Accept Settlements for Tax Debts?
Yes, taxpayers can work with the IRS to make alternative arrangements if they cannot afford to pay their back taxes. If the amount owed is below $100,000, short-term installment agreements are available. These agreements give taxpayers an extra 180 days to pay off their tax bill.
For those who owe less than $50,000, there are long-term IRS payment plans that give taxpayers up to 72 months to pay off the debt. A taxpayer will need to qualify for an installment plan. If approved, the taxpayer will end up paying more than they initially owe. The IRS will calculate the total amount owed in accordance with the applicable interest rate.
De Jong explains that requesting a payment plan can be a fairly simple process for the majority of taxpayers. “If you’re current in your filings, you can generally work an installment agreement out online without any direct contact with IRS, at least for taxpayers with income tax matters under $50,000.”
Submitting an offer in compromise (OIC) is an option for low-income taxpayers. The taxpayer will offer to settle the debt for less than the full amount owed. As long as the taxpayer fulfills their part of the agreement, the rest of the debt is eliminated. An application fee is required, so careful consideration is required before applying.
The IRS’s collections activities are put on hold while the taxpayer’s application or request is considered. Once a payment alternative is in place, the taxpayer will need to comply with all requirements and make all tax payments. Otherwise, they risk being expelled from their plan and the IRS resuming collection practices.
How Can a Tax Attorney Help with Back Taxes?
Speaking with a tax attorney or a tax professional can guide you on how to best handle back taxes. These professionals help individuals find tax relief by advocating for their rights, negotiating with the IRS, and representing them in court. The tax code is lengthy and detailed. There may be options available to you that you don’t know about.
Find Experienced Legal Help
If you owe back taxes, the best approach is to pay them as soon as possible. If you are unsure if you owe back taxes, the first step is to log into your IRS.gov account. You can either make full payment or take steps to request a payment agreement or negotiate the total debt down. Speaking with a tax lawyer can help you understand what programs through the IRS you qualify for.
Visit the Super Lawyers directory to begin your search for an experienced tax attorney. For more information, read our guides on tax law.
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Enter your location below to get connected with a qualified attorney today.Additional Tax Debts and Back Taxes articles
- What Is the Process for Resolving Tax Debts?
- How Long Can the IRS Collect Back Taxes?
- Can You File for Bankruptcy to Resolve Tax Debts?
- What Is an Offer in Compromise?
- How to Create a Payment Plan with the IRS for Tax Debts
- Working With the IRS When You Can’t Pay Your Taxes in Full
- Will the IRS Take My House for Owing Back Taxes?
- When to Get Legal Help for Resolving Tax Debts
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