Tips on Paying Back Taxes
It is easy to get behind on filing and paying your taxes. But if you get behind on paying your taxes, it can be difficult to get back on track to pay off your taxes in full. Any delays can increase the amount you owe in interest and penalties. It is important to take care of tax filing and payments quickly to avoid tax penalties, collections, and government liens.
Getting Your Back Taxes Paid
Any tax that is not paid when due can be subject to interest, which can run from the date of the return until the date of payment in full. The interest rate is 3% over the federal short-term rate, and the interest compounds daily.
If you file your return on time but do not make the full payment by the due date, you may be subject to a failure-to-pay penalty. The penalty for failure to pay your taxes is 0.05% of the amount you owe for each month, up to a maximum of 25%.
If you fail to file your return and you owe tax, you can also be assessed a failure-to-file penalty. Failure-to-file penalties are usually 5% of the tax owed for each month, 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 can quickly add up. If you think you won't be able to file on time, you can file an extension. An extension usually gives you 6 more months to file your return but it is not a payment extension. If you file an extension, you still have to pay your taxes owed by the tax filing deadline, usually April 15.
Now that you know why you need to get your back taxes paid as soon as possible, here are some steps you can take to pay your unpaid taxes.
Step 1 - Make Sure You Owe
When you're looking at a tax bill you can't afford, you should make certain the return is correct. Review your return carefully and compare it to the previous years. If you filed on your own, consider working with a tax accountant to see if there are any deductions you missed.
Step 2 - Make a Plan and Stick to It
Develop a payment plan that takes into consideration 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.
Step 3 - Contact the IRS
Many people never want to contact the IRS but it can be to your advantage. The IRS is used to working with people to clear their tax liability through a payment plan or installment agreement. If you request an installment agreement, that may reduce the failure to pay penalties by half.
Step 4 - Request Waiver of Penalties
If you have a history of paying on time, you may be able to avoid paying some of the penalties and interest by asking for a first-time waiver. If you have paid late before, the IRS may still waive penalties if you can show “reasonable cause" for the delinquency. This step can reduce your tax bill by nearly half the amount owed.
Step 5 - Choose a Payment Option
There are several ways you can pay your tax bill, including:
- Short-term payment plan (up to 180 days)
- Use a credit card (with a processing fee)
- Set up installment payments
- Get a private loan
It's important to understand the effect of interest and penalties on your overall tax liability. If you select an IRS payment plan, interest will continue to be added to your bill until you are completely paid off but the interest may be at a lower penalty rate.
Step 6 - Offers in Compromise
An offer in compromise (OIC) is an agreement with the IRS that settles your tax liabilities for less than the amount owed. The IRS typically won't accept an OIC less than the “reasonable collection potential" (RCP). The RCP includes the value that can be generated by selling or seizing your assets, such as real property, automobiles, bank accounts, and other property. A reasonable amount is allowed for basic living expenses but is subject to negotiation.
Step 7 – When You Really Can't Pay
If you owe on your taxes but you're facing extreme financial difficulties, you can ask the IRS to assess you as Currently Not Collectible. In such a situation, the IRS would determine if the collection of the liability would create a hardship that would leave you unable to meet necessary living expenses. If you are declared Currently Not Collectible, the IRS will stop collections actions until a status change.
What Not To Do When Paying Back Taxes
When you're dealing with back taxes, there are some things you should not do. If you have any questions or concerns, it's a good idea to speak with an accountant or tax attorney first.
Don't Avoid the IRS
When you receive a letter in the mail from the IRS, read it and respond. If you are asked to submit an unfiled return or pay money, ask for an extension of time or set up a payment plan. The worst thing you can do is nothing. Ignoring a notice letter will not change your tax situation. However, responding can result in more options, extensions, or relief from some penalty payments.
Don't Just Accept an IRS Filed Substitute Return
If you failed to 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 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
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.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.