How to Solve Back Tax Problems
Back taxes refer to taxes that were not paid when due. Owing back taxes to the IRS can be the result of any number of reasons such as failing to file a tax return for a number of years, a taxpayer’s inability to pay, the death or illness of a taxpayer, or simply forgetting. Regardless of the reason, you will eventually need to deal with the issue and work out an agreement with the government to pay the back taxes owed. Hoping that the IRS will simply “forget” about the money that you owe is often a foolish and costly gamble.
If you don’t take steps to address back taxes, the IRS has significant powers to recover the money that it is owed, such as: putting a tax lien on your home or other property, freezing your bank accounts, seizing your tax refund, or garnishing your wages. The longer that you wait to resolve back tax issues, the more the problem can spiral out of control. If you know that you have not paid your income taxes or you have received a notice of past due taxes from the IRS, it is very important that you contact a tax attorney as soon as possible.
The experienced tax attorneys at Robinson & Henry have developed a series of Five Steps to Address Back Tax Problems
Gather all of your tax and financial documents
Prepare and File Past Due Tax Returns
Before you can know the extent of your back tax problems or what possible remedies are available, it is important to have all of the information in front of you. The first step in addressing back taxes is to gather your tax and financial documents. This includes tax returns from the last years that you filed, tax documents necessary for filing such as W-2 or 1099 Forms, or financial statements for your business or personal accounts. If you are having trouble tracking down some of the tax documents, you can request free copies directly from the IRS.
Additionally, it is important to determine exactly what you owe, or at least what the government says that you owe. Generally, the IRS will provide you with a notice if you owe back taxes or failed to file a return indicating the balance due. The amount that you owe will also determine which of the different collection techniques that the IRS will use.
Gathering and preparing all of your documents ahead of time will reduce the time and money you spend on tax attorneys or tax professionals and make your back tax problem that much closer to resolution.
Perhaps the quickest and most effective way to begin to address back tax problems is to file any past due tax returns. Regardless of whether or not you can pay the amount owed, filing past due tax returns has significant advantages, such as:
- Avoid Interest and Penalties – The IRS’s failure-to-file penalties are much harsher than the failure-to-pay penalties. By filing your past due returns, you can limit or reduce the amount of interest and penalties imposed on your tax balance.
- Protect Your Tax Refund – The IRS holds income tax refunds in cases where their records indicate a past filing is due. They will hold on to the refund until the past due returns are filed or they negotiate some type of agreement with the taxpayer. If the IRS is holding your refund for failing to file a return, you have three years from the due date of that return to file in order to receive your tax refund.
- Protect Social Security and Disability Benefits – If you are a self-employed individual and do not file, your income will not be reported to the Social Security administration and you will not receive credits towards social security and disability benefits.
- Avoid Issues Obtaining Loans and Protect Your Credit – Most financial institutions require a copy of your tax return from the prior year as part of the loan approval process. Failing to file your return can cause significant delays in your attempts to buy a house, obtain a business loan, etc. Furthermore, outstanding tax balances that result in IRS collection such as a tax lien will have significant impacts on your credit score.
Utilize Possible Advantages from Filing Past Due Tax Returns
When you don’t file your tax return, the IRS may generate a substitute return for you. However, this return may not properly account for all of the deductions, credits, or exemptions that could apply to your specific situation. If the IRS prepares a substitute return for you, you are still able to file your own return and it is in your best interest to do so. This ensures that you can take advantage of all possible deductions, credits, or exemptions and receive a tax refund, if eligible.
After your tax returns have been filed and any deductions, refunds, etc. have been applied to your account, the IRS will prepare a final tax bill indicating the amount that you owe to the IRS. If this bill is unpaid, it will trigger the collection process.
Pay Off Your Tax Debts
Once you have received your final tax bill after filing your tax returns, you can create a plan to pay off your back tax debts and avoid IRS collection actions. In 2011, the IRS unveiled its Fresh Start initiative aimed at making it easier for individuals and businesses to pay back taxes and avoid tax liens. Despite the emphasis on making it easier for taxpayers to satisfy their tax debts, it is still very important that you do so as quickly as possible to avoid interest or penalties.
If you have the means, the most effective way to settle a tax bill is to pay it in full.
If you cannot pay your tax bill in full, the IRS does provide some options, such as:
- Installment Agreements – installment agreements allow you to pay your tax debts in smaller monthly installments over time.
- Temporary Delay – the IRS may determine that your specific situation allows for the option to temporarily delay the collection of your taxes. Note that during this delay period, the IRS will continue to monitor your ability to pay and the IRS may file a tax lien on your property to protect the government’s interest in your assets. A temporary delay will not eliminate your tax liability, but it can give you some breathing room and time to get back on your feet.
- Offer in Compromise – if you qualify for an Offer in Compromise, the IRS may agree to settle your tax liability, including interest and penalties, for less than the full balance due. It should be noted that the IRS will only consider an Offer in Compromise as a last resort option.
- There are also other possible options outside of the IRS. One would be to use a credit card payment to the IRS to pay off back taxes. In this situation, it is very important to research and compare the differences in interest rates, fees, and penalties between the IRS and your credit card company to determine which route makes more financial sense. Additionally, refinancing and taking out a line of credit against your home equity could be an option to generate the funds necessary to pay off back taxes. Another possible option could be through bankruptcy. While tax debts are generally not dischargeable in a Chapter 7 bankruptcy, there are certain limited circumstances where income tax liabilities may be dischargeable.
- The diverse range of experience among the attorneys at Robinson & Henry across matters including tax, business, and bankruptcy can provide you with valuable advice and help determine the best method for settling back taxes with the IRS.
Once you have determined a course of action for addressing your back tax problems, it is important to follow your plan and keep up with payments. Failure to follow the terms of a negotiated settlement can result in the IRS resuming their collection actions such as placing a lien on your home or garnishing your wages. In addition to resolving your back tax problems with the IRS, the attorneys at Robinson & Henry can help you create a road map for future tax payments as well as all other matters of estate planning.
Dealing with the IRS is serious business. It is never wise to go it alone when facing the power of the federal government. If you are facing a back tax problem, call 303-688-0944 or email us at Bill@RobinsonandHenry.com as soon as possible. One of the great advantages of working with us is the cross collaboration we offer with attorneys working in different areas of the law firm.
If your tax problems are related to other business or family situations, we can explore the full scope of the challenges and handle situation expeditiously and with your best interests protected. We are your legal allies. Call us to discuss your challenges and consider your options for moving forward. There is always a solution to an IRS problem. Together we will work to bring your situation to a satisfactory conclusion.