What are back taxes? Back taxes are any tax money that tax-payers owe to the IRS or state and local tax agencies. The sooner you pay your back taxes, the better it will be for your finances, as interest and penalties pile up on tax debt over time, making you pay much more later on.
You may owe back taxes in the following scenarios:
- Your employer did not withhold enough taxes from your paycheck or other earnings.
- You were self-employed but did not pay your estimated taxes.
- You made an unexpected profit on investments which you did not pay tax for.
Tax Relief on Back Taxes
Tax relief for back taxes refers to a reduction in the amount of taxes owed for previous tax years. This can be achieved through various means, such as negotiating a payment plan with the tax authority, having penalties and interest waived, or applying for a tax forgiveness program.
You can apply for tax relief on back taxes through the following ways:
IRS payment plans
The IRS may give you a payment plan that lets you pay back your overdue tax bill (plus accrued interest and fees) as installments over a period of time. Taxpayers can apply for an extended short-term payment plan of up to 180 days by contacting the IRS by phone or mail.
If your outstanding tax bill is more than $25,000, then you have to make your payments via automatic withdrawals from a bank account. If you make your payments with a debit or credit card, you’ll have to pay their respective processing fees.
Offer in compromise
You might be able to find tax relief through an “offer in compromise” in IRS Form 656-B. This lets you settle your back taxes without high interest or penalty rates. Applicants have to pay a $205 fee and an initial payment which is non-refundable. (Low-income taxpayers may get a fee waiver.)
To determine whether you qualify for an offer in compromise, the IRS will assess your ability to pay, your income and expenses, previous tax returns and how much you have in assets. That said, the possibility of getting an offer in compromise is remote and you must not depend on it.
If there are valid reasons for you not being able to pay your taxes, you can request the IRS to put your account in “currently-not-collectible” status. The IRS may ask you to prove your finances are as bad as you claim. For that you will need to supply information about your monthly income and expenses on a Collection Information Statement or for Wage Earners and Self-Employed Individuals form.
Keep in mind though that this form of tax relief is temporary. The IRS may review your income annually to see if your financial situation has improved. It could also file a tax lien against you. In essence, being deemed “currently not collectible” doesn’t make your tax debt go away permanently.
Hiring a tax-relief company
If you’re confused about filling out forms for tax relief, you may take the help of a professional tax-relief company. However, if the company loses or delays your application, you will still be liable for your tax debt, interest and penalties with the IRS. Plus, you may have to pay a non-refundable upfront fee to the tax-relief company. And it may be a percentage of the tax you owe. That fee may be higher than what you end up saving on your tax bill if the IRS accepts your offer.
Before applying for any type of tax relief, it is best to consult a tax professional or certified public accountant (CPA). They can give you better-personalized guidance about the options to help you get out of tax debts.