If you neglected to file a tax return in a previous year or have not kept enough money aside to pay all your taxes, you may have some back taxes that you do not know about.
It is no secret that dodging taxes is a serious crime. However, you have plenty of options and support to ensure that you cover your whole back tax.
You can spare yourself from any penalties that may come your way. Here is everything you need to know about what are back taxes and how to deal with them using the right strategies.
What Is Back Tax?
Back taxes are taxes that you owe. You didn’t pay them off when they were due. For instance, you may have had some remaining taxes left to be paid in the previous year.
You might not have withheld enough money to pay off your tax bill, or you may have neglected to file a tax return in the past. You can owe back taxes at the local, state, and federal levels for various reasons.
For example, some people do not pay off their owing taxes because they do not have enough money. After all, how can you withhold money for taxes when your account does not have enough to support yourself and your loved ones.
Everyone is expected to withhold money for taxes from their paychecks throughout every year. However, plenty of people are unaware that they may have some taxable unemployment benefits. This would not have been counted as money withheld automatically for tax deductions.
Alternatively, you may have sold some stock or other assets. This would net you a profit leading to a capital gains tax. Many investors forget or neglect to report their capital gains taxes. Then you would owe more back taxes, especially if you have under-reported your income or have made some math errors.
Those who are self-employed or working as freelancers may also end up owing taxes. Especially if you do not pay both your employer and employee’s share of Medicare and social security taxes.
Freelancers also need to make quarterly tax payments if they owe around at least a thousand dollars while filing for a return. Otherwise, freelancers can face harsh penalties for failing to do so.
How Do Back Taxes Work?
It is best not to think that owing back taxes and not submitting a tax return are the same. This is because if you have filed your tax returns on time, then the penalties of owing back taxes will be less severe.
That said, you can submit your return even if you cannot pay your full taxes.
Otherwise, you can expect to owe interest and a 5% penalty if you file late tax returns. This can go up to 25% of the maximum tax bill. If you still fail to pay, then you will owe interest and a 0.5% late payment fee every month.
If you do not file a tax return on time, you can have the IRS submit a substitute return for you. However, this will not include deductions or any credits that can offset your owing taxes. The IRS will then send you a hectic bill demanding that the entire amount needs to be paid in full.
The amount on the bill will also include late penalties and interest charges that have accrued if you file your tax return without paying what you owe. Here is how you can resolve IRS tax debt.
Paying Your Back Tax
Not everyone who has neglected to file a tax return will owe back taxes. Plenty of people get refunds from the IRS after filing a tax return. This is where you could get a tax refund if you withheld more taxes than you owed. Otherwise, you may also qualify for tax credits.
However, you are required by law to clear your debt and pay all back tax. The IRS gets approximately 10 years from your tax due date to collect this money. Working with the IRS can be intimidating. Many people prefer hiring tax experts to help with the paperwork to ensure that everything is filed correctly.
Your first step should be to file your back tax returns if they are owed. This is when you should locate the necessary IRS forms. Ensure that these are for the years you did not file returns since forms and laws change all the time.
You can also get previous years’ tax documents, like your 1099s or W-2s that are old. All you must do is submit the Request for Transcript of Tax Return 4506-T form to the IRS.
You can also get an IRS payment plan after catching up on your tax returns. This can involve enrolling in a short-term plan for free. However, this only applies if you can pay off your entire balance in under 180 days.
Otherwise, you may need to apply for another IRS installment plan if you need more time.
What Happens if You Do Not Pay?
Your tax bill will keep growing each month because of late fees and interest charges until you finally pay off the total amount. If your tax bill becomes more serious, the IRS can seize your bank accounts, property, social security benefits, and wages.
You may also end up with a tax lien for any of your properties. This way, the government will take their cut before you get any money from a property sale. In some cases, government applications like applying for a new passport may be rejected if you have delinquent back taxes.
However, the IRS may not pursue garnishing wages and seizing your assets if you make your payments on time as agreed. Always keep in mind how long do you have to pay taxes and how to pay your tax bill if you want to avoid these harsh penalties.
Settle Back Taxes Today
It is always necessary to file your tax return on time if you do not want to owe any back tax. This should be done even if you cannot pay your entire tax amount in full.
Otherwise, you can face interest charges and penalties that keep increasing until you pay off your owing taxes. If you enjoyed reading this back taxes guide, check out some of our other posts for more information.