What are Back taxes?
Back taxes refer to taxes that were not entirely paid by the due date. Typically, these are taxes that are owed from a previous year. Back taxes may be due to failure to pay or file a tax return. Regardless of the cause, there is a penalty when you owe the IRS and miss the tax returns deadline.
The longer outstanding back taxes linger, the more interest and penalties will accumulate. When you fail to file your returns, the IRS will sanction you 5% of the amount you owe for each month you delay. However, the penalty gets to a maximum when you are five months late. Thus the maximum penalty is 25% regardless of how much the delay prevails. On the other hand, when you fail to pay what you owe, you will be charged 0.5% of your unpaid taxes for each month. However, this penalty won’t go beyond 25% of what you owe in taxes.
Approaches for paying off tax debts
Do you owe back taxes? If yes, I am sure you are curious to know the options to settle the debt you owe in taxes. These alternatives include:
1. Consider an installment plan:
The IRS payment plan permits individuals who owe taxes to pay within a given time.
Hence you can repay your past-due tax debt (together with collected interests and penalties) in payments over a specified period. The IRS proffers two types of installment plans:
a. Short-term payment plan: This plan applies to individuals who owe less than $100,000. You will have 180 days to pay your taxes. You will not be charged a setup fee if you qualify for the short-term payment plan. You can make payments by automatic withdrawals from your checking or savings accounts or via order, debit/credit card, or check.
b. Long-term payment plan: The payment period is 72 months. The amount owed is less than $50,000 in combined tax, penalties, and interest.
An advantage of the payment plan option is the IRS won’t breathe down your throat. You will get fewer IRS notices since you’re considered compliant. Another merit is it prevents the IRS from taking further collection action, such as the seizure of assets. Finally, taxes can be paid in small, manageable amounts, thus reducing the financial burden of repayment.
The downside of this option is that interests continue to incur, and it takes longer to offset the debt.
2. Offer In compromise:
This alternative lets you settle your tax debts for less than what you owe. This option may be handy if you can’t pay the tax debts. Despite being the most publicized option, it is challenging to access. The IRS grants less than half of the requests. As a result of the inaccessibility of this tax relief, it is always advisable to consider other options first.
To decide if you’re eligible for this option, the IRS will take into account your ability to pay, your income and expenses, and the value of your assets. Aside from that, tax debts paid are less. The other benefits of this alternative include:
- Collection activity is brought to a halt.
- Bankruptcy is averted.
- All federal tax liens are released.
The disadvantages include: it’s not readily attainable, you won’t be able to claim tax credits, and using this route doesn’t offer you a sense of privacy.
3. Request a “Currently not available” status:
Here you can demand that the IRS places your account on “Currently Not Collectible” status if your financial situation isn’t in the right shape to deal with tax debts. The IRS, in turn, will ask you to complete a form in order to verify that your financial situation is as dire as you claim. This alternative only gives temporary relief as your tax debts don’t automatically go away. The IRS may review your financial status annually to see if your situation has improved enough to collect the tax debt.
4. Hire a Tax consultant:
Consulting a tax consultant can help you relieve the stress involved in tax resolution issues. Tax consultants are licensed to represent clients before the IRS. When seeking a tax professional’s services, it would help if you were cautious of unscrupulous individuals who claim to offer tax consultancy services. Some might be uncertified or inexperienced staff. They will waste your time and money without providing a reasonable solution to your issue. You can find tax consultants on the largest IRS Enrolled Agent Search.
5. File for bankruptcy:
Using this choice can eliminate part of what you owe in taxes. However, this option only applies to income taxes; thus, payroll taxes or fraud penalties cannot be cleared via bankruptcy. The tax debt must not be recent – a minimum of three years before filing for bankruptcy. Also, you must have filed the tax return for whose debt you want to clear at least two years before filing bankruptcy.
In conclusion, you shouldn’t feel it’s impossible to pay off your back taxes. The IRS has several options that may help you pay your debts or reduce your tax liability. You should consult a tax professional should the process seem daunting; they will be in the best position to give some IRS tax tips and sensitize you on payment options that best fit your needs.
