Tax Service

What You Must Know About Back Taxes

From the tons of activities that keep us engaged, to life disruptions, and even procrastination, a myriad of reasons holds for late payment of taxes. Tax season may be behind us, but the smart thing to do would be to give attention to your Back Taxes. You’ll find out why in a bit.

What are Back Taxes?

Back Taxes are taxes that were partially unpaid or were not paid for at all in the year that they were due. This tax debt is owed to the Internal Revenue Service (IRS) – the agency responsible for the collection of taxes and enforcement of tax laws – and failure to take the appropriate actions attracts some consequences.

Failure to pay your taxes by the deadline, giving a wrong report of your income, or neglecting to file a tax return altogether are causes for back taxes.


Consequences of back taxes

As mentioned earlier, back taxes result from not paying your taxes fully or at all as at when they are due. Unpaid taxes accumulate interest and penalties steadily; and asides from this, they could eventually invite serious legal action from the IRS. Such consequences include:

  • Tax Lien: a tax lien is a legal claim made by the Federal or State government against your assets when you neglect or fail to pay a tax debt. The lien serves as a guarantee for payment of your tax debt, and to ensure that the government gets the first claim over any other creditor who also has legal rights to your property. Before a lien, you first get a Notice and Demand for Payment bill – a letter that explains how much you owe – the government may then place a lien on your assets, if you do not respond to the bill.
  • Wage Garnishment: wage garnishment or wage levy is a court judgment that orders that a portion of your income be withheld and diverted towards settling your debt. Wage garnishment is used to settle debts such as unpaid taxes, child support payments, and student loans. Your income will be diverted to the creditor up until your debt is paid off or otherwise resolved. Typically, for your earning to be garnished, the creditor must obtain a court order proving that you are delinquent in making a payment; but a court order isn’t required if the debt is owed to the IRS. A wage garnishment is usually the last resort to collect debts and can have an unfavorable effect on your credit ratings, which is why it is important to file your tax return even if you cannot pay by Tax Day – or better yet, pay your taxes if you can.
  • Jail Time: tax evasion is the legal activity of deliberately avoiding to pay tax liabilities, and in the most extreme situation, the IRS might pursue criminal charges against you for it. Tax evasion is a serious crime with jail time of up to 5 years as a penalty, so it’s best to respond as soon as possible to the Notice and Demand of Payment bill when it is initially sent.

Penalties and Interest charges

In 2020, the IRS pushed back the April 15 Tax Day deadline to July 15 due to the COVID-19 pandemic. This year again, the due date was extended – now taxpayers have until May 17 to file their return, ask for an extension and pay any taxes they may owe to the IRS.

Failing to file your tax returns and paying your income taxes by the due date can attract penalties and interest charges such as a Failure-to-File Penalty and Failure-to-Pay Penalty.

A failure-to-file penalty pertains to anyone who files their taxes after the Tax Day deadline, or to those who applied for an extensionafter the extension due date. The penalty is usually 5% of all unpaid taxes for every month or partial month that your tax return is late; and it starts accumulating the day after the May 17 deadline or if an extension is filed, the day after the October 15 deadline.

As of 2021, if you file your tax return more than 60 days past the May deadline or your extension date, the IRS can impose a minimum penalty of $435 or 100% of your unpaid tax; whichever is smaller – and this penalty won’t exceed 25%.

You will incur a failure-to-pay penalty if you don’t pay any taxes owed by the May 17 tax deadline, and it is important to know that the penalty starts to accumulate from the day after the May 17 deadline. However, the failure-to-pay penalty might be waived if you’re supposed to pay both types of penalties. Failing to pay your taxes attracts 0.5% of your back taxes for every month or partial month your payment is late.

In addition to these penalties, the IRS will charge you interest on the taxes you haven’t paid. Interest accrues and compound daily and is calculated from the date your return is due until the date your balance is fully paid.

It is best to complete your tax return on time to avoid these tax penalties and interest charges from the IRS. A better option if this is not exactly feasible is filing for an extension and paying your entire tax bill before the May deadline.

Getting Help for Your Back Taxes

Dealing with Back Taxes can seem scary and overwhelming, but it should come as a relief to know that the IRS has a range of program options you can choose from to settle your debt. A few of them are:

  • Setting up an installment agreement: this is a common way of paying back taxes to the IRS. This option lets you pay your debt over a long-term payment plan, with your total tax debt being divided into monthly payments over a certain period.
  • Providing an Offer in Compromise: this is a tax relief program, whereby, the IRS helps reduce your tax liability by considering your unique circumstance; such as your income, expense, and ability to pay. An offer in compromise allows you to settle your tax bill for less than what you initially owed.
  • Applying for a Currently Not Collectible status: this option is excellent for you if you are not in the financial position to pay your back tax at the current time. The IRS will declare your account uncollectible if paying back your tax debt will affect your daily living expenses. It is important to note that qualifying for this option won’t make your back tax disappear, but will only prevent the IRS from levying your assets or garnishing your income.

As seen, owing back taxes is not a pleasant situation, and it can be a hassle trying to resolve it all on your own, however, hiring professionals can make the whole process easier and stress-free. They can also help you find the best program that fits your unique tax situation. Need help resolving your tax issues? Book a Free consultation with Victory Tax Lawyers now to get started.