People do not normally look forward to tax season because of the many lists of things they need to prepare to ensure that their tax returns are filed and everything they need to pay is paid. Working with a professional accountant or a tax expert is always an option, but you need to connect with one as early as possible.
If you insist on working on your tax returns on your own, you may miss a detail or fail to file your tax returns altogether. In the chaos of it all, you may even find that you owe back taxes because you do not have enough money withheld for taxes or you simply were not able to file tax returns the previous year.
What are Back Taxes?
Back taxes sounds concerning right off the bat, but what is it? Back taxes are simply the taxes that you were not able to pay during the time that they were due– they are typically from a prior year.
There are different levels to back taxes, you can owe them at the federal, state, or local level, and you can owe them for several reasons.
Here are some common reasons for owing back taxes:
- not having enough money withheld for taxes from their paychecks
- being unaware that unemployment benefits are taxable most year
- selling stock or other investments that result in capital gains taxes
- under-reporting income
How Do Back Taxes Work
Although they sound similar, owing back taxes is different from failing to file a tax return. Owing back taxes have less severe consequences if you file on-time returns. Keep in mind that you still need to submit your returns even when you cannot pay your taxes in full yet.
You can expect the following penalties:
- For failure to file, you will owe interest plus a 5% penalty for each month the return is late, up to a maximum of 25% of the tax bill.
- For failure to pay, you will owe interest, plus a 0.5% monthly late fee.
The IRS can prepare and submit a substitute return for you if you fail to file your tax return. But keep in mind that it might not include credits and deductions that could offset the taxes you owe.
The IRS will send you a bill demanding that you pay what you owe. Your interest and late penalties will begin to accrue or file up if you file a return but fail to pay the amount in full.
What Happens If I Fail to Pay My Back Taxes?
As you know, you will incur penalties and interests if you keep on neglecting or failing to pay your back taxes. Your tax bill will continue to grow each month until you pay it in full.
The IRS will apply your future tax refunds to your back taxes through the Treasury Offset Program. If you let your tax bill reach a seriously delinquent level, you can expect even more severe consequences.
The IRS can take a hold of your wages or Social Security benefits, or even seize your bank accounts and other property. If the situation calls for you to sell your property, the IRS can attach a tax lien to your property– which means the government gets its cut before you receive your money.
Points to Remember
You should always file your tax return on time even if you cannot pay your taxes in full yet. Keep in mind that penalties and interest will continue to pile up until you have paid your back taxes in full.
If you owe taxes, it is better to work with the IRS than hide from them. You can even apply for a short-term payment plan with the IRS if you believe you can pay your tax debt within 180 days, or a long-term installment plan if you need more time.