Many people delay filing and paying their taxes for various reasons. It could be uncertainty about owing taxes, messy bookkeeping, or simply a fear of the process. These unpaid taxes are known as “back taxes,” and they can cause significant problems.
If you owe back taxes, the IRS can:
- Penalize you
- Charge extra interest
- Keep any tax refunds you’re owed
- File a return on your behalf
- Seize your assets
- Ask the State Department to block passport renewal.
Owing the IRS back taxes is a serious matter. The sooner you file and pay, the better. Don’t think you’re in the clear just because you’ve delayed for a few years. The IRS can collect tax debts up to 10 years old, so it’s wise to file and tackle your tax debt promptly.
When Do Taxes Become Back Taxes?
Every year, you must file a tax return and pay the taxes you owe based on that return. It’s the law, even if you think you might not owe anything this year.
If you need extra time to file, remember this: Paying your taxes on time is crucial. Why? Because the fines you might face are calculated based on what you owe the IRS. If you pay your taxes promptly, no fines will come your way.
Calculating your estimated tax bill and making payments is not as tough as it sounds. Check out our guide on how to do it.
7 Ways to Pay and Clear Your Back Taxes
If you have the funds, there are seven ways to settle your back taxes. Here’s how:
- Pay online using your bank account, debit card, credit card, or services like PayPal. Just remember, credit card and debit card payments may have extra fees.
- Make payments by check or use IRS Direct Pay from your bank account. These options are fee-free.
- If you have an Electronic Federal Tax Payment System (EFTPS) account, you can pay with your bank account through that system.
Online payments through IRS Direct Pay using your bank account are usually the best choice. It’s convenient and cost-effective. Just keep in mind that Direct Pay goes offline for maintenance every day from 11:45 p.m. to midnight Eastern Time, and from 11:45 p.m. to 7:00 a.m. on Sundays. So, aim to make payments during regular business hours anywhere in the United States.
Worried about not having enough cash to cover your overdue taxes?
You have options.
1. Partial Payment: If you can’t pay the full amount, consider making a partial payment. This will help reduce the penalties and interest that pile up.
2. Credit Card: You can also use your credit card to pay your taxes. Sometimes, the credit card interest is lower than IRS fines.
3. Installment Plan: The IRS offers installment plans. While there might be setup fees, it helps you plan how to pay your taxes. The steps vary depending on how you file and structure your business.
- If you owe less than $100,000, you might qualify for a short-term plan (180 days or fewer).
- If you owe $50,000 or less, a long-term plan might work for you. Apply online for the lowest fee. There are extra charges for other application methods.
- Opt for automatic monthly withdrawals (Direct Debit) to get the lower setup fee. It’s required for balances over $25,000.
- Keep in mind that interest and penalties continue until you’ve paid in full, so paying sooner saves you money.
4. Modify Your Plan: You can change your payment plan for a $10 fee.
5. Interest Rates: The interest rate for late taxes varies with market rates. Usually, it’s between 1.5% and 6%.
6. Businesses: Businesses follow similar processes and fees, but the application process depends on who’s representing them.
Now, let’s talk about tax resolution. This is how you sort out any IRS debts, whether it’s penalties, unpaid taxes, asset seizures, or something else.
A tax expert, like an enrolled agent, CPA, or tax attorney, can assist you with:
- Audit Appeals: If you’ve been audited, they can help.
- Payment Issues: They’ll assist in resolving payment and collection problems.
- Debt Negotiation: They can negotiate a debt settlement or an installment agreement for you.
In some rare cases, they might even get your debt reduced with an offer in compromise. You can check if you qualify using the IRS’s online OIC Pre-Qualifier tool. Be cautious of OIC scams during tax season – some unscrupulous companies make false claims about wiping out your debt.”
Can I get an extension for my late tax filing?
If you know you’ll be filing late, you can fill out Form 4868 to ask for more time. No need to explain why you’re filing late. With this form, you automatically get an extension until October 15 without any late-filing penalties.
Remember, even with an extension, pay your taxes on time. If you owe, pay what you owe by the standard deadline. Delaying payment may lead to other penalties.
Business owners making quarterly estimated tax payments, stick to your schedule, extension or not.
Extension or not, you’ll still owe taxes plus interest. Don’t wait to pay if you can help it. Interest can pile up, especially on big balances.
If your tax software can’t calculate it, the IRS will send you an estimate via regular mail.
Facing IRS penalties for late tax filing or payment?
Here’s what you need to know:
- Late Filing Penalty: If you file your taxes past the due date or your extension period, you’ll incur a 5% fine of your unpaid taxes each month, maxing out at 25% of your total tax owed.
- More than 60 Days Late: If you file over 60 days late, you’ll face a minimum penalty of $435 or 100% of your owed taxes if less than $435.
- Late Payment Penalty: For unpaid taxes, there’s a 0.50% monthly fine, again up to a 25% cap.
The good news:
These penalties don’t stack. If you’re late to both file and pay, you’ll only be charged the 5% late filing penalty.
But wait, there’s more:
- Interest: The IRS also adds interest on unpaid taxes from the day after the deadline. It compounds daily, so check the current rate on the IRS website.
- Back Taxes: Technically, there’s no limit to filing back taxes, but hefty penalties can accumulate. The total fees don’t grow indefinitely, capped at 25%.
- Collections: If you neglect filing for years, the IRS may resort to wage or bank account levies, garnishing your income.
- Tax Lien: A federal tax lien can affect your financial options, limiting loans, credit use, and property sales.
- Worst-case Scenario: Willfully avoiding taxes can lead to up to five years in prison and fines of up to $250,000 for tax evasion.
Don’t let IRS troubles pile up – take action now to get your business caught up on taxes.
Dealing with the Consequences
Not filing taxes can lead to various problems. Besides missing potential tax refunds, many aspects of life require recent income tax returns. If you haven’t filed in a while, you won’t have these documents.
For instance, when you apply for a passport, they may ask for your recent tax returns. The same goes for mortgages, loans, and even health insurance applications.
When it comes to college financial aid, your most recent federal income tax returns are a must. And don’t forget about your retirement benefits, like Social Security and Medicare; they depend on your reported income. Neglecting to file for years can put your future income at risk.
If you’re ready to tackle those overdue tax returns, consider getting some professional assistance. It might involve reviewing your past financial records, updating your income and expenses, and ensuring you’re not overpaying. The BSE Accounting team is skilled at straightening out finances and connecting you with tax experts to handle those missing returns too.