Getting behind on your taxes is all too easy. The hard part is getting your back taxes paid in full. To make matters worse, your tax bill can nearly double in size if not handled quickly. By definition, any tax that is left unpaid 60 days after it was due is considered “back taxes” by the IRS. When you file your tax return late, you’re charged interest on any unpaid balance. The late payment interest alone is up to 25%. You may also be subject to failure to file and failure to pay penalties. Read on to learn some helpful tips on paying back taxes.
Law on Paying Back Taxes
So now that you know why you need to get your back taxes paid as soon as possible, let’s look at some steps you can take to pay your back taxes.
Step 1 – Make Certain You Owe. When you’re confronting a tax bill you can’t afford, you should make certain the return is correct. Read 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. Now that you’ve decided to tackle your back taxes, develop a plan that takes into consideration your current income and expenses, your assets, and any available credit to cover the debt.
Step 3 – Contact the IRS. It’s often to your advantage to contact the IRS or your state tax authority with your proposal for paying back taxes before a collection action is initiated. You will have a better negotiating position if you voluntarily report past due taxes.
Step 4 – Request Waiver of Penalties and fees. 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: ask for an up-to 120-day extension to pay, use a credit card, 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.
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 collection of the liability would create a hardship that would leave you unable to meet necessary living expenses. There are also some instances in which taxes can be discharged in bankruptcy, but this should not be attempted without an experienced attorney.
What Not to Do When Paying Back Taxes
When you’re dealing with back taxes, there are some things you should never do. If you have any questions or concerns, it’s a good idea to speak with an accountant or tax attorney first.
1. Avoid the IRS. This is the worst thing you could do. 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.
2. Accept an IRS Filed Substitute Return. This is really bad too! If you failed to file your taxes, it’s likely that the IRS filed a substitute return on your behalf; This return is based only on information the IRS has from other sources. The IRS will not include any deductions or exemptions. You don’t have to accept a substitute return. You can file the missing years.
3. 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 a you enter into an installment agreement you are considered to be in good standing with the IRS and most state taxing authorities. Plus, the quicker you pay-off your back taxes, the less interest you’ll be charged.
Free Consultation with a Utah Tax Attorney
If you are here, you probably have a tax law issue you need help with, call Ascent Law for your free tax law consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506