What Are Back Taxes?
Simply put, back taxes are taxes that were not paid off in the year that they were due. If another tax season rolls around and there’s still money owed from a previous year, that money is considered back taxes.
Back taxes may simply be the result of the taxpayer not paying what they owe, but they may also arise from more complicated situations such as previously unfiled tax returns or incorrectly reported income. Whatever the case, owing money to the government is always a bad situation to find oneself in, and it can result in some serious consequences.
What Happens if I Don’t Pay My Back Taxes?
There are a number of outcomes from avoiding your back taxes and none of them are pleasant. These can include but are not limited to:
After multiple notices of money owed, the first action the IRS will take against a delinquent taxpayer is a penalty ranging from $100 to $435, which can be a lot of money to someone who’s already in considerable debt. This penalty also collects interest..
You may be prosecuted for tax evasion and sentenced to up to 5 years in prison and/or fined up to $250,000 for individuals and $500,000 for businesses.
The government may place a tax lien on your assets in order to ensure you settle your debts or risk seizure of your property, vehicles, securities, and bank accounts.
You may have a portion of your paychecks seized in order to settle your debts.
How Can I Avoid Back Tax Trouble?
Now that you’ve seen how grave the situation can get when you avoid paying your taxes, let’s look at ways to stay on the up and up with what you owe and how to reduce the damage.
If you’re unsure whether or not you owe money to the IRS, it’s in your best interest to figure that out as soon as possible. You can call them at 1-800-829-1040 and speak to a representative who can help you figure out your tax situation.
If you do know that you owe money to the IRS, it may be wise to consult with a professional. Of course, that costs money, too, so you can always use these next few free tips to get yourself on the path towards a debt-free life.
Pay as Much as You Can Right Away
You may not be able to pay the full amount, but paying whatever you can right away could be your best option. Provided you’re not using a credit card and sinking yourself into further debt with even worse interest rates, you can avoid paying a significant amount of interest by biting the bullet and paying what you can, as soon as you can.
Consider an Installment Agreement
The IRS will work with you to come up with an IRS payment plan that will get them the money they’re owed and keep you from suffering any consequences. You agree to a monthly payment over a set number of months in which you think you’ll be able to pay off the debt.
There’s also something called a Partial Payment Agreement which works much like an Installment Agreement except you’ll be allowed to settle on a reduced amount.
Declare “Currently Not Collectible”
This can buy you some extra time in order to get together the money you owe to the IRS. Of course, this is not a plan in and of itself, it only serves to give you the space to figure out a viable plan. In order to qualify, you must be able to prove that your financial situation is such that you would not be able to afford basic necessities were you to begin paying immediately. Once you are declared “not currently collectible” then the IRS will no longer garnish your wages and all levies will be lifted until the grace period has ended.
Offer in Compromise
An offer in compromise may be a long shot, as less than half of all requests per year are granted, but it’s still worth consideration if you’re looking to avoid a lien on your house, seizure of your car, or jail time.
This program allows for debt to be relieved at a reduced dollar amount through either a monthly payment plan or in a one-time lump sum. This has worked for some and they’ve saved thousands of dollars for it, but the odds of coming to such a settlement are relatively low, so it’s not among the most viable options.
Yes, finding yourself behind on your taxes can be a scary situation, but there are methods and resources to help you out. Stay informed and stay on top of your tax returns, and if you need more advice, then consider reaching out to a professional.
Frequently Asked Questions
Can Back Taxes Keep Me From Getting a Mortgage?
The IRS can put a levy on your property in order to collect what's due to the federal government. This means that they can levy a new home purchase, and that's all the more reason to keep up your payments as they are due.
Should I Pay My Student Loans or Back Taxes First?
Student loans can be quite overwhelming, but the worst kind of debt to overlook is back taxes. One thing about the IRS that you should always know is that the IRS always gets its money. Regardless of the number of people you owe, always prioritize back taxes.
What If I Owe Money to IRS but Have Child Support Payments?
Wage garnishments are not established unless you are severely behind on your child support payments. You are considered in arrears if you haven't made full child support payments in several months. By law, 50% of your pay can be garnished for child support.