What Are Back Taxes?

You may owe back taxes if you don't have enough money withheld for taxes or if you forgot to file a tax return last year. Fortunately, you have options. In this article, we'll cover why you may have tax arrears, what happens if you don't pay, and the best strategies for dealing with tax arrears.

Definition and examples of tax arrears

Back taxes are taxes that were not paid when due, usually one year before. You can return taxes at the federal, state, or local level, and you may owe them for a variety of reasons.

Many people owe back taxes because not enough money has been withheld from them to tax their paychecks for the entire year.

Some people can also be owed because they did not know unemployment benefits are taxable most years and the money was not automatically withheld.

Selling stocks or other investments at a profit may result in capital gains taxes, which you must report. You may also end up owing taxes because you made a math mistake or deliberately underestimated your income.

The IRS has indicated that up to $ 10,200 in unemployment benefits are tax-free in tax year 2020 if your modified adjusted gross income is less than $ 150,000.

This provision is part of the American Rescue Plan Act of 2021.1 But the law does not apply to state income taxes. Some states have adjusted their own laws to comply with the federal government, but others are still taxing benefits. Keep an eye on your status during filing season to make sure where yours is.

If you are self-employed or self-employed, you may end up owing if you fail to pay the employer and employee portion of Social Security and Medicare taxes.

Additionally, self-employed workers are required to make quarterly estimated tax payments, if they expect to do so. They owe at least $ 1,000 when they return, and they can face penalties for not doing so.

How back taxes work

There is a difference between not filing a tax return and returning taxes. Generally, the consequences of a tax refund are less severe if you have filed your returns on time, so filing a return is essential, even when you may not be able to pay your taxes in full. The penalties are as follows:

Failure to file: You owe interest plus a 5% penalty for each month you are late in filing, up to a maximum of 25% of the tax bill.

Default: You owe interest plus a 0.5% monthly late fee.

The IRS can file a replacement tax return for you if you don't file a tax return, which may not include credits and deductions that could offset taxes owed.

It will send you an invoice asking you to pay in full, and interest and late fees will begin to accrue if you file a return but do not pay the full amount due.

Do I have to return taxes?

Not everyone will owe taxes if you don't return. In fact, many people will find that the IRS owes them a refund when they file an income tax return.

You can receive a tax refund if you have more taxes withheld than necessary or if you qualify for certain tax credits, such as the Earned Income Credit.

But the law requires you to pay them if you owe back taxes. The IRS has 10 years from the time you had to pay your taxes to collect them.

Some companies claim that they can pay your tax debt for you, but very few taxpayers actually qualify for the programs these companies advertise.

Working with the IRS when you can't pay your taxes is often the best option. In fact, the Federal Trade Commission warns that tax settlement companies often leave people with even more debt.

If you owe a tax refund or tax credit, you must file a return within three years of the due date on 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 each month until it is paid. Future tax refunds for which you are eligible will be applied to your back taxes through the Treasury Compensation Program.

The consequences can be even more serious if your tax bill is seriously overdue. The IRS can garnish your wages or Social Security benefits, or seize your bank accounts and other assets.

You can also put a tax lien on your property so that the government gets its share before you get your money if you sell it. In some circumstances, your passport application may be rejected due to back taxes.

How to return taxes

The first step is to file a tax return if you owe taxes. Look for IRS forms for the years you did not file, because tax laws and forms can change from year to year.

You can request tax documents from prior years, such as Forms W-2 and Earlier 1099s, by submitting Form 4506-T, Request for Tax Return Transcript to the IRS.

You can often set up an IRS payment plan when you are up to date with your tax returns. You can enroll in 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 request an installment plan from the IRS.

Interest and late fees will continue to accrue on both types of plans, but you will incur late fees at a reduced rate of 0.25% per month instead of the typical 0.5%.

The IRS will not take collection actions, such as the seizure of property or the pledge of your wages, as long as you make your payments as agreed.

If you can't pay anything on your tax bill, you may have other options. You can request that your account be reported as currently uncollectible, which means that the IRS will temporarily halt collection efforts.

You will still have tax debt, more interest, and late payments. In some circumstances, the IRS may accept an offer in compromise, in which you pay off your debt for less than you actually owe.

We hope you enjoy watching this video about What Are Back Taxes

Source: Stephen Lee CPA

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