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What Are Back Taxes?

The concept behind the phrase "back taxes" is pretty straightforward. Back taxes are taxes owed for a prior year that aren't paid by the tax due date. In other words, if a taxpayer can't pay all their taxes for a year, they will owe back taxes.

If back taxes are owed, the taxpayer's debt will continue to increase because the Internal Revenue Service will also assess interest and tax penalties. Late payment penalties are usually 0.5% for each month, plus interest. However, if the taxpayer also files their taxes late, the penalties increase significantly.

Withholding Reduces Back Taxes

If you are an employee, even if you made no tax payments for a year, you likely owe the IRS less than your entire tax bill. That's because most U.S. employers must withhold a certain amount of your paycheck each pay period to cover the tax you owe on the payment. If your employer made the required withholding, the IRS will automatically apply it to your unpaid tax bill when you file your taxes to reduce what you owe. If more has been withheld than you owe for the year, the IRS will give you a tax refund equal to the difference.

IRS Has 10 Years To Collect

The IRS usually has 10 years to collect unpaid back taxes. After that time, the statute of limitations prevents the agency from collecting. The 10-year period begins running when the tax was initially assessed. A federal tax assessment is when the IRS records your tax liability. In most cases, the IRS has three years from when a tax return was due or the date it received your return, whichever is later, to assess taxes for a tax year.

For example, your taxes for 2014 are generally assessed on the date the return is due if you filed by the deadline, April 15, 2015. This is the assessment date, even if you filed your return earlier. That means the IRS has 10 years from April 15, 2015, to collect taxes for 2014.

What if I Never Filed?

If you don't file a federal income tax return for a tax year, no taxes are assessed, and the 10-year period for the IRS to collect never begins. Essentially, this means the IRS has unlimited time to collect taxes from people who were required to file but never did. However, the IRS rarely tries to collect tax debts from individuals who failed to file more than six years ago unless they committed a crime, such as tax evasion or money laundering.

What Can the IRS Do To Collect?

The IRS has various collection options during the 10 years it has to collect back taxes. However, the IRS must follow procedures to ensure you are protected under the Taxpayer Bill of Rights. These protections include the right to appeal any IRS determination.

If you fail to pay your taxes when due, the IRS will send you a bill for the amount of tax due, plus penalties and interest at the federal short-term interest rate, plus 0.5% (8% in June 2024). If the first bill isn't paid, the IRS will send you at least one more. The agency will begin to take action to collect if you don't pay after receiving your final bill.

The IRS's collection actions can include:

  • Automatically applying future income tax refunds to your bill
  • Filing tax liens
  • Using tax levies to collect the tax you owe by seizing property and assets

Tax Liens

federal tax lien is a legal claim against your property or assets, including property you may own in the future. Failure to pay the tax owed after you receive your first tax bill automatically creates a tax lien.

The tax lien is accompanied by a notice of federal tax lien, which is filed with the state or local government to notify creditors that the IRS has priority in collecting on any debt secured by the property. These documents are public records and are available to employers, landlords, and others to review. You will also receive a copy of the notice within five days of it being filed.

Appealing a Tax Lien

The notice of federal tax lien will include a notice of your right to a collection due process hearing. You will have until the date listed on the notice to request a hearing from the IRS's Office of Appeals. If you disagree with the decision from the Office of Appeals, you will have 30 days to ask the U.S. Tax Court to review the decision.

Tax Levies

A tax levy is when the federal government seizes your property to pay a tax debt. The IRS won't seize property if you have a current or pending installment agreement or offer in compromise. The agency may also decide not to issue a levy if it determines that it would cause you economic hardship by preventing you from paying basic living expenses.

Usually, the IRS will only seize property after taking the following steps:

  1. The tax has been assessed and the taxpayer sent a tax bill
  2. The taxpayer did not pay the tax bill
  3. The IRS sent the taxpayer a final notice of intent to levy and notice of a right to a hearing at least 30 days before seizure

Property or assets that can be seized by the IRS using a levy include:

  • Houses, real estate, cars, or other physical property
  • Wages or salaries (known as "wage garnishment")
  • Bank accounts
  • Certain retirement accounts
  • Federal payments, including Social Security benefits and contractor payments

IRS Penalty Relief

While the IRS can be unrelenting in its efforts to collect back taxes, the agency generally tries to work with struggling taxpayers to come up with a payment plan to provide tax relief. Taxpayers may even be able to request penalty relief, depending on their individual situation.

If it is the first time you have not paid your taxes and you have a history of filing and paying, the IRS offers a first-time penalty abatement. The IRS also offers tax penalty relief where there was reasonable cause for failure to meet your tax obligations, including:

  • Fire or natural disaster
  • Death or serious illness of someone in the taxpayer's family
  • Taxpayer's inability to obtain records

IRS Payment Agreements

The IRS is willing to work with taxpayers to get their tax bills paid and will stop the collection process if you agree to pay using an installment agreement or the agency's offer in compromise (OIC) program.

An installment agreement with the IRS lets you pay back taxes you owe in small, manageable payments that spread out the financial impact of repayment over time. The IRS has simplified access to installment agreements to ease the burden on taxpayers.

Another option for taxpayers who can't pay their entire tax bill is the OIC program. An offer in compromise is an agreement between a taxpayer and the IRS to settle the taxpayer's debt for less than what is owed to the IRS. The IRS has flexibility in performing the financial assessments necessary to determine whether a taxpayer should receive an OIC, made on a case-by-case basis. Generally, the taxpayer must be able to prove they can't make larger payments for an OIC to be approved.

Still Have Questions? A Tax Lawyer Can Help

If you owe back taxes, it can seem impossible to pay them off. But the IRS offers payment options to help you pay down your tax debt and reduce the penalties you owe. An experienced local tax attorney can help work out IRS payment plans, get tax penalties reduced or waived, reduce your tax liabilities with an OIC, and prevent future unpaid tax bills.

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