Avoid the headaches and find out how to settle your back taxes before the year ends.
In this article:
- The Premise
- What Are Back Taxes?
- What Are the Potential Consequences of Not Paying Back Taxes?
- 5 Ways to Resolve Back Taxes by January
How to Settle Back Taxes
The Premise
Owing money to the IRS, your state, or your local tax collection agency is one of the most stressful situations any American may face. When you have unresolved tax debt, it’s natural to worry about the actions the government can take against you. However, the IRS, state, and local tax agencies have a vested interest in working with you to resolve your tax issues. Here’s what you should know about outstanding taxes, how they might affect you, and how you can clear up any issues before December 31st.
What Are Back Taxes?
Simply put, back taxes are any taxes you failed to pay in the year they were due. Even if you filed your taxes on time and paid part of your tax bill, the remainder counts as unpaid taxes. One can owe back taxes at the federal, state, or local level.
Keep in mind that the Internal Revenue Service has 10 years to collect any taxes owed to them. This means that while it’s technically possible to run out the clock and avoid any ramifications for unpaid tax dues, the more likely scenario is the IRS will notice and come after you for failure to pay your tax bill. This is not an issue you want hanging over your head as you enter 2019.
What Are the Potential Consequences of Not Paying Back Taxes?
Particularly on the federal level, the repercussions of not paying back taxes can be costly. The IRS can charge a penalty equal to 0.5% of your unpaid tax debt each month, up to a maximum of 25%. Monthly interest on the amount owed is also charged. Between interest and penalties, you can end up on the hook for much more in back taxes than you originally owed.
The IRS, state, and local tax agencies also have multiple ways of enforcing payment of back taxes. They can garnish your wages, seize your financial accounts, and place liens on your property to cover your unpaid back taxes. Even if you didn’t file a tax return in the first place, the IRS can file one for you to determine the approximate amount you owe and take actions to collect that.
5 Ways to Settle Back Taxes by January
Luckily, you have options to fix your back tax issues quickly–even if you don’t have the cash on hand to pay off your entire debt at once. The IRS is often surprisingly willing to work with those who need help with their back taxes. Here are some of the quickest options available for paying back taxes:
1. Set Up an Installment Agreement
Many taxpayers find themselves in the position of not being able to pay off their outstanding dues in one lump sum. For those who can make several smaller payments over the course of three years, however, an installment agreement with the IRS may be the best possible option. You’ll likely have to pay interest and penalties, raising the total amount owed. However, setting up an installment agreement can help avoid tax liens or wage garnishments.
2. Establish a Partial Payment Installment Agreement
This option is well-suited to taxpayers who have some ability to pay their back taxes over time but not the full amount owed. In order to qualify, you need to fill out a financial statement for the IRS showing your income and total living expenses. Keep in mind that the IRS may ask you to sell assets to satisfy some of your back taxes debt. Consider speaking with a tax attorney or a Certified Tax Resolution Specialist because they may be able to help in settling for the lowest monthly payment possible.
3. Provide an Offer in Compromise
In contrast to installment agreements, offers in compromise can help you pay off your back taxes if you’re able to make one lump sum payment or several short-term payments. Under such agreements, you must pay off all of the back taxes you owe but at a reduced amount. The IRS takes into consideration a number of factors when reviewing such offers, including one’s ability to pay, expenses, and income. If you do qualify, you stand to save up to thousands of dollars in penalties, interest, and taxes by going this route.
4. Qualify as Not Currently Collectible
This option is excellent for taxpayers who owe back taxes but are not in a position to pay back any amount at the current time. If the IRS agrees to categorize you as “not currently collectible,” your back taxes won’t go away. However, the IRS won’t try to levy your assets or garnish your wages. Utilizing this option gives you the opportunity to explain to the IRS why you can’t pay via a collection appeal.
5. Take Advantage of Innocent Spouse Relief
For some taxpayers who owe back taxes, the responsibility lies with a spouse or former spouse. If your spouse (or ex-spouse) is responsible for having improperly filed your taxes, you may qualify. Both spouses are generally liable for tax debts that result from jointly filed taxes. However, if you can show your specific circumstances fall within the IRS’s guidelines, you may qualify for relief of responsibility for the back taxes incurred by your spouse (or ex-spouse).
Owing back taxes is stressful in any situation. However, there are ways to resolve it quickly and, surprisingly, easily. Keeping the lines of communication open with the IRS, your state, or local tax agency can help you avoid the worst consequences of having back taxes. You may even be able to discharge your debt more quickly and cheaply than you imagined. Going to your tax preparer for help is another potential option. Don’t be afraid to communicate directly with the IRS; keep in mind that they want to work with you to find a way to get the money owed to them in a way that is mutually beneficial.
Have you ever been in a jam with the IRS or your state or local tax agencies? What did you do to resolve the issues of your back taxes? Tell us about your experience below.
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