Definition: Back taxes are taxes that have not been paid on time, usually from previous years. You may have back taxes at the federal, state, or local level, and there can be several reasons for these taxes.
How do back taxes work?
Back taxes are amounts that have not been paid to the government when they were supposed to be. Back taxes typically apply to prior tax years when income taxes were not paid. You can owe back taxes at the federal, state, or local level.
Many people owe taxes because they did not have enough tax withheld from their paychecks throughout the year. Some may owe because they were unaware that unemployment benefits are taxable in most years, and money was not automatically withheld. Selling stocks or other investments at a profit can also trigger taxes on realized gains, which you must report. You may also owe taxes due to a calculation error or reporting incorrect income.
When you leave your tax return unfiled or fail to pay a tax bill for months or years, you owe back taxes.
Example of back taxes
For example, let’s assume you started a consulting business and you are self-employed. Two years ago when you started, you did not know that you were required to pay both the employee and employer portion of Social Security and Medicare taxes. You also did not realize that you had to make quarterly estimated tax payments, which are due when you expect to owe at least $1,000 when you file your tax return. You did not pay these taxes two years ago, and now you owe back taxes to the government. You are likely facing penalties now.
Penalties for not filing a tax return
There is a difference between failing to file a tax return and owing back taxes. Generally, the consequences of owing back taxes are less severe if you filed your returns on time, so it is essential to file even when you cannot pay your taxes in full.
The penalties are as follows:
- Failure to file: You will owe interest plus a 5% penalty for each month the return is late, up to a maximum of 25% of the tax bill.
- Failure to pay: You will owe interest along with a monthly late fee of 0.5%.
The federal tax office can file a substitute return on your behalf if you do not file a tax return, which may not include the credits and deductions that can lower your tax liability. It will send you a bill demanding full payment, and interest and penalties will start accumulating if you filed a return but did not pay the full amount due.
Do I have to pay back taxes?
Not everyone has to pay back taxes if they ignored filing a return. In fact, you will find that most people are owed tax refunds when they file a tax return. You may receive a tax refund if you had more withheld than needed for taxes, or if you qualify for certain tax credits such as the Earned Income Credit.
However, it is legally required for you to pay if you owe back taxes. The federal tax office has 10 years from the due date to collect taxes that were owed. Some companies may claim that they can settle tax debts on your behalf, but very few taxpayers actually qualify for the programs advertised by these companies. Dealing with the tax office when you cannot pay your taxes is usually a better option. In fact, the Federal Trade Commission (FTC) warns that settlement companies often leave people owing even more debt.
Note:
If you are eligible for a tax refund or tax credit, you must file a tax return within three years from the due date of the return to claim it.
What happens if I don’t pay my back taxes?
Due to penalties and interest, your tax bill will continue to increase month by month until it is paid. Any tax refund due to you in the future will be applied to your back taxes through the Treasury Offset Program. The consequences can be more severe if your tax bill becomes significantly overdue. The federal tax office can seize your wages or Social Security benefits, or confiscate your bank accounts and other assets. It can also levy a tax lien on your property until the government receives its share before you get your money if you sell it. In some cases, your passport application can be denied due to back taxes.
How to pay back taxes
Your first step is to file prior tax returns if you owe back taxes. Look for federal tax office forms for the years you haven’t filed returns, as tax laws and forms can change from year to year. You can request tax documents for previous years, such as old W-2 and 1099 forms, by submitting Form 4506-T to the federal tax office.
You can often set up a payment plan with the federal tax office once your tax returns have been processed. You can join a short-term plan for free if you can pay the full balance within 180 days. Otherwise, if you need 180 days or more to pay off your debt, you can apply for an installment plan with the federal tax office. Interest and late fees will continue to accumulate in both types of plans, but you will incur a late fee of 0.25% per month instead of the typical 0.5%. The tax office will not pursue collection actions like asset seizures or wage garnishments as long as you keep making your payments as agreed.
If you can’t afford any part of your tax bill, you may have other options. You can request that your account be reported as currently uncollectible, which means that the tax office will temporarily stop collection efforts. You will still owe the tax, along with interest and late payments. In some cases, the tax office may agree to an Offer in Compromise, where you resolve your debt for less than what you actually owe.
Frequently Asked Questions (FAQs)
How long do you have to file back tax returns?
Of course, the tax office wants you to pay all taxes owed. If you file a return, the federal tax office has 10 years to collect your debt. If you want to claim a credit or tax refund due to you, you have three years from the return’s due date to make the claim.
Can back taxes be forgiven by the federal tax office?
In fact, yes. The time limit for the federal tax office to collect a tax obligation is 10 years from the date of assessment – either on the day your return should have been filed for that year or the date the return was filed, whichever comes later. After the time limit has expired, the tax office cannot continue trying to collect debts – unless you filed a fraudulent return. However, this does not mean you can simply wait 10 years and wipe your record clean with the federal tax office. If you file for bankruptcy, leave the country, or submit an Offer in Compromise, the time limit is suspended or extended. The tax office may also place a tax lien on your property or seize it, or summon you to court before the 10 years expire. This can affect your credit rating and make your remaining financial situation more difficult.
Source:
https://www.thebalancemoney.com/what-are-back-taxes-5114248
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