“Nothing is certain but death and taxes,” quipped Benjamin Franklin. Indeed, many people dread Tax Day even more than death since Tax Day comes every year. If you’re one of the many Americans who have fallen behind on their tax filings, learn how to pay your back taxes and resolve your issues.
Do I Owe Unpaid Taxes?
The term “back taxes” — tax amounts due in prior reporting periods that remain outstanding — typically refers to federal taxes, penalties, and interest owed to the IRS. However, you may also owe unpaid tax debts to local or state tax agencies.
The simplest way a person or corporation may owe unpaid taxes is if they fail to file a tax return. They may also find themselves liable for tax debt if they underreport income or profits, fail to make full and timely payment of their taxes owed, or claim deductions incorrectly for a reporting period.
For example, many individuals receive assistance with health insurance premiums purchased through the marketplace. These subsidies are based on their projected income. If they make more than they anticipated, they may have to repay some or all of the subsidized amount when they file their tax return.
Who Must File a Tax Return?
Most U.S. citizens and permanent residents must file a federal tax return. The IRS sets minimum income thresholds that vary depending on age and status (i.e., married, single, head of household). Even if you are not required to file a tax return, you may benefit from doing so to access all applicable tax credits and refunds.
Each state has different rules regarding income, property, and corporate taxes. Individuals who reside in one state and earn income in another may have to file tax returns in multiple states. Even death can’t hold off taxes — in most cases, a decedent’s spouse or personal representative must file one final return on their behalf.
If you don’t file a return at all, the IRS may file a ‘substitute for return‘ (SFR) on your behalf. This may result in a higher tax burden than if you had filed a return yourself, because it will not capture potential deductions like business expenses, charitable donations, or medical expenses. Consequently, you may owe taxes you don’t even know about.
Why Should You Address Your Back Taxes?
If you receive income legally, the IRS probably already knows about it — employers report payroll details directly to the tax authorities. Even if your income is obtained illegally or goes unreported, you must still pay the appropriate taxes. (Al Capone learned this the hard way, earning 11 years in prison for failing to file back taxes on the profits from his mafia enterprises.)
There are significant penalties for unpaid taxes in addition to potential jail time. The IRS levies a ‘Failure to File Penalty‘ of 5% of your unpaid taxes for each month or part of a month that your tax return is late. It also assesses a penalty of 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid. (These penalties offset each other, and they won’t exceed 25% of your unpaid taxes.)
The IRS can file a ‘levy,’ allowing it to garnish a portion of your wages, seize money from a bank or other financial account, and sell your vehicle or other personal property to pay your debt. The IRS can also file a Notice of Federal Tax Lien, a public record that notifies current or potential creditors of your outstanding tax debt. In the short term, a tax lien can impact your ability to get a loan, mortgage, or other line of credit. If your tax debt remains unpaid, the IRS can take ownership of the liened property.
If you have significant delinquencies, the IRS may refer your debt to the State Department — which can deny your application for (or revoke) your passport.
How Far Back Can You File Taxes?
You can file tax returns at any time for any year that you did not file, or you can file an amended return if you need to make substantive corrections. (The IRS automatically checks your calculations, so it’s not necessary to file an amended return for math errors.)
If you need more time to file, you can request an extension; however, this does not extend your deadline to pay any taxes that you owe. The IRS recommends you estimate your taxes due and pay by the regular due date to avoid penalties and interest.
If you are unable to pay your back taxes, you have a few options. You can ask the IRS to set up an installment payment plan for the entire amount. Or, if you’re eligible, you may be able to negotiate an ‘offer in compromise‘ to settle your obligation for less than full value. For state and local taxes, contact the applicable department of revenue directly to discuss resolution.
If you are unable to pay, you can ask the IRS to designate your account as ‘currently not collectable‘ (CNC). This pauses its immediate collection efforts, but penalties and interest continue to accumulate.
Can I Wait Out the IRS?
At a minimum, the IRS has three years to audit your tax return after the date it was due or the date you filed it, whichever is later. This ‘statute of limitations‘ climbs to six years if your return includes a “substantial understatement of income” (generally, a failure to report more than 25% of your gross income).
If the IRS determines that your substantial understatement was fraud rather than error, it has an unlimited amount of time to perform an audit. Additionally, there is no statute of limitations if your underpayment of taxes was due to overstating deductions or claiming credits improperly.
If you haven’t filed a tax return at all, or file a fraudulent return, there is no statute of limitations for the IRS. It can come after you for these back taxes at any time — for the rest of your life. There are numerous other loopholes that extend the collection deadlines, so rolling the dice isn’t the best strategy.
Resolve Your Tax Debt Now
Resolving outstanding back taxes can be tricky because the tax laws are complex and change significantly over time. An experienced tax attorney may be able to help you negotiate a reduction in fees, penalties, and interest charges. Don’t wait any longer to settle your tax debt.