Tips on Paying Back Taxes

It's easy for taxpayers to get behind on filing and paying their taxes. However, if you fall behind, it can be difficult to get back on track. It can be especially hard for people experiencing financial hardship.

Unfortunately, if you don't pay your income tax bill, the IRS will commence collection activity. Depending on how much you owe, they may pursue levies, liens, and other legal remedies to recover their money.

Here, we'll discuss some helpful tips on paying back your tax debt, regardless of your financial situation. We will also briefly discuss the consequences of not paying your federal taxes.

Paying Your Back Taxes

Unpaid taxes are subject to harsh penalties and interest. These run from the date of your tax return until you repay the full amount. Not only will you pay interest, but the interest rate is high - 3% higher than the federal short-term rate. Plus, the interest compounds daily.

If you file your taxes on time but don't pay the balance due before the due date, the IRS may assess a failure-to-pay penalty. The penalty for failure to pay your taxes is 0.05% of the amount you owe (monthly) and can increase to up to 25%.

If you don't file your return on time and owe tax, the government will also assess a failure-to-file penalty. These penalties are usually 5% of the back taxes, up to a maximum of 25%. When your tax return is more than 60 days behind, there is also a minimum penalty of $435, or 100% of the taxes owed, whichever is lower.

Those penalties add up. If you don't think you can file your tax return on time, you can file for an extension. An extension usually gives you six additional months to file your return. However, this doesn't extend the time you have to pay your taxes. You'll still have to pay your taxes by the tax filing deadline, usually April 15.

Needless to say, it's important to pay your back taxes. Next, we'll discuss steps you can take to resolve tax problems.

Make Sure You Actually Owe the IRS

If you receive a tax notice from the IRS, the first thing to do is confirm you really owe the debt. Mistakes can happen. Review your return carefully and compare it to previous tax years. 

If you filed your own return, consider working with a tax professional or CPA to see if you missed any deductions or tax credits.

Make a Payment Plan and Stick to It

Develop a payment plan that considers your current income and expenses, your assets, and any available credit to cover the debt. Paying down your tax debt quickly will reduce the penalties and free up more money to cover your other debts. 

However, you don't want to propose a monthly payment installment plan that you can't afford. Otherwise, you'll end up in the same situation.

IRS collection tactics are severe. If you think your current tax debt is high, it will be even higher if you don't abide by your installment agreement.

Contact the IRS

Many people are afraid to contact the IRS. However, open communication can be to your advantage. IRS employees are used to working with people to clear their tax liability through a repayment plan or installment agreement.

If you request an installment agreement, that may reduce the failure to pay penalties by half. This is especially true for low-income taxpayers who cannot afford high penalties and interest. 

You can request an installment plan through the IRS website (IRS.gov). You will have to pay an application fee but this will forestall the collection process.

Ask the IRS to Waive Penalties

If you have a history of paying on time, you may be able to avoid some of the penalties and interest by asking for a first-time waiver. 

If you have paid late before, the IRS may still offer tax relief by waiving penalties if you can show “reasonable cause" for the delinquency. This sort of tax help can reduce your tax bill by nearly half.

Choose a Payment Option

There are several ways to pay your tax bill, including:

• Short-term payment plan (up to 180 days)

• Use a credit card or debit card (with a processing fee)

• Set up installment payments

• Get a private loan to make your tax payments

It's important to understand the impact interest and penalties will have on your overall tax liability. If you select an IRS payment plan, interest will continue to accrue until you pay your bill in full.

Submit an Offer in Compromise

An offer in compromise (OIC) is an agreement with the IRS that settles your tax liabilities for less than the full amount. The IRS typically won't accept an OIC less than the “reasonable collection potential" (RCP).

The RCP includes the value the IRS can generate by selling or seizing your assets, such as real property, bank accounts, and other property. The government will accept a reasonable amount for basic living expenses, but this is subject to negotiation.

Submit Proof of Financial Hardship

If you owe taxes but are facing extreme financial difficulties, you can ask the IRS to assess you as Currently Not Collectible. The IRS will determine if the collection of the tax liability would create a hardship that would make you unable to meet necessary living expenses.

If the government declares you Currently Not Collectible, the IRS will stop collection activity until there is a status change.

What Not to Do When Paying Back Taxes

When you're dealing with back taxes, there are certain things you should avoid doing. If you have any questions or concerns, it's a good idea to a tax professional first.

Below are the things you should avoid doing when you owe the government back taxes.

Don't Avoid the IRS

When you receive a letter in the mail from the IRS, read it and respond. If they ask you to submit an unfiled return or pay money, ask for an extension or set up a payment plan. The worst option is to do nothing.

Ignoring a notice letter will not change your tax situation. In fact, it may cause the IRS to flag your tax return for an audit or pursue collection action. However, responding usually provides you with options, including extensions or relief from penalties.

Don't Blindly Accept an IRS Filed Substitute Return

If you didn't file your taxes, the IRS may file a substitute return on your behalf. This substitute return is based only on information the IRS has from other sources, including payroll reporting. The IRS will not likely include any additional deductions, credits, or exemptions. 

You don't have to accept a substitute return. You can file your own tax returns for the missing years.

Don't Fail To Set Up a Tax Debt Payment Plan

If you can't pay your taxes in full, set up a payment plan. While you're making payments, you are unlikely to have a tax lien placed against your assets. 

Once you enter into an installment agreement, you are considered to be in good standing with the IRS and most state taxing authorities. The quicker you pay off your back taxes, the less you'll owe in interest.

Owe Back Taxes? Get Professional Legal Help Today

If you're lucky, you'll get a tax refund this year.  But when you owe back taxes, the penalties and interest add up fast. It's easy to feel like you will never get out from under your back taxes. An experienced tax attorney can work with the IRS to resolve your tax issues. It may even be possible to lower your penalties and interest and set up a payment plan you can afford.

If you have questions about your rights or want help negotiating with the IRS, you can contact an experienced tax attorney in your area for legal advice.