What is meant by back taxes?
Back taxes occur when a person or business fails to file a tax return, or fails to pay what they owe by the payment deadline.
Common reasons people or businesses face back taxes include life disruptions, mismanaging funds, or not keeping sufficient financial records. Once a person or business falls behind on their taxes, getting caught up can be overwhelming. It is important, however, to catch up as soon as possible to limit the interest and penalties that the IRS may assess.
What is the penalty for filing back taxes?
There is no penalty for filing back taxes. Instead, filing and paying back taxes prevents you from incurring additional interest and penalties.
When you don’t file your tax return on time, the IRS assesses a failure to file penalty. That penalty is 5% of the unpaid taxes for each month or part of a month that it is late. There is also a penalty for failing to pay on time. That penalty is 0.5% for each month or part of a month that the payment is late. The maximum combined failure to file and failure to pay penalty is 47.5% of the unpaid tax. The IRS also charges interest on the unpaid taxes and the penalties assessed.
How to file back taxes?
Filing back taxes is usually very similar to filing current tax returns. One of the first steps involves gathering all of your tax documents for prior tax years. You can request a transcript from the IRS so you can review the tax information that the IRS has for you. This can help to ensure that you don’t accidentally forget to include taxable income.
In most cases, you can electronically file tax returns for the current year and the prior two tax years. If you prepare your own back taxes, you will likely only be able to electronically file a tax return for the current tax year. Any years that cannot be electronically filed need to be mailed for filing.
What can I do if I can’t pay my back taxes?
If you are unable to pay your back taxes immediately, you have a few options. The most common option is requesting a payment plan. Once the IRS approves your payment plan, you make payments until your tax debt is paid. Another common option is to apply for an Offer in Compromise (OIC). With an OIC, you are negotiating with the IRS to settle your tax debt for an amount that is less than the full amount of your tax debt. Not everyone is eligible for an OIC. You can use the IRS Offer in Compromise Pre-Qualifier tool to see if you might be eligible.
If you cannot pay any amount towards your tax debt, requesting currently not collectible (CNC) status is an option. If the IRS agrees to place your account into CNC status, then the IRS will not start collection actions until you are out of CNC status. Your financial situation, however, will be reviewed each year to determine whether you still qualify for CNC status.
Many states offer payment plans, compromise programs, and other options to delay or reduce the amount of back taxes that you may need to pay.
How many years back can you file back taxes?
There is no limit to how far back you can file taxes. To receive a refund, however, you typically need to file within the standard IRS time limit (generally three years from the original due date). There are some exceptions to the general rule if you are owed a refund.
Although there is no limit to how far back you can file taxes, you might not need to file all of your unfiled tax returns. Catching up on your tax filings in the most efficient manner depends heavily on your individual circumstances.
How many years back can the IRS go on back taxes owed?
There is no limit to how far the IRS can go back for unfiled taxes. The IRS does not typically enforce the tax filing requirement if the tax return due date is more than six years old. If the IRS does decide to enforce the tax filing requirement for returns that are more than six years old, it is usually because the IRS suspects fraud or illegal activity.
If you have unpaid taxes, the IRS generally has 10 years from the date of assessment to collect the back taxes. However, there are exceptions and circumstances that can cause the period of collection to be extended. You should know that you can have unpaid taxes even if you did not file a tax return. If you do not file your tax return timely, the IRS can file a return for you. This is called a substitute for return (SFR). If the IRS files an SFR on your behalf, the IRS will typically not include credits, deductions or other favorable items on the return.
What happens if you have back taxes?
If you have not filed a tax return, the IRS may file a tax return on your behalf with the information that they have available. This type of return is called a substitute for return (SFR). In many cases, you will owe more money on a SFR because the IRS does not claim credits, deductions and other favorable tax items on the SFR.
If you have filed a tax return, or if an SFR has been filed for you by the IRS, then the IRS generally has 10 years to collect the outstanding taxes due. The IRS may take various collection activities, such as liens, levies, and garnishments. The IRS can even cause your passport to be revoked. Additionally, penalties and interest are likely to accrue until the back taxes have been paid in full.
Each state has different collection policies for unfiled and unpaid taxes. If you have outstanding taxes owed to a state, however, you can expect collections activities such as liens, levies and garnishments to occur at some point.
Can I negotiate with the IRS to reduce the amount of back taxes I owe?
You may be able to reduce the amount of back taxes that you need to pay by negotiating an Offer in Compromise (OIC) with the IRS. Generally, the IRS will accept an OIC if you offer an amount that is equal to or greater than the amount the IRS expects they could collect from you in a reasonable amount of time. The IRS will consider your ability to pay, income, expenses and assets when deciding if you qualify for an OIC. You can use the IRS Offer in Compromise Pre-Qualifier tool to see if you might be eligible for an OIC.
If some portion of the back taxes that you owe is from penalties, you may be able to have the penalties fully or partially removed by requesting a penalty abatement. You usually need to show that you had reasonable cause for your failure to file or failure to pay timely. A First-Time Penalty Abatement may also be available if you have a good history of filing and paying your taxes timely.
Some states also have an offer in compromise program.
Can I get a payment plan to pay my back taxes?
Yes, most taxpayers qualify for a payment plan with the IRS to pay their back taxes over time. The IRS offers short-term payment plans, which allow you to pay the amount owed within a few months or less. There is no fee to set up a short-term payment plan with the IRS. A long-term payment plan with the IRS, called an installment agreement, can also be set up. The IRS offers installment agreements that can extend for several years.
Most states also offer payment plans to pay back taxes. The period of time and the application process varies by state. You can contact your state taxing authority to set up a payment plan that fits best for your specific situation.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
