Being proactive when dealing with the IRS cannot be emphasized enough. You should file and pay any outstanding taxes as soon as you realize you may owe them, or you have missed a filing deadline, to avoid additional penalties and interest.
Here are a few things you should keep in mind if you have to pay or file back taxes.
What are back taxes?
Back taxes are amounts owed to the federal or state governments from a previous tax year.
Federal tax returns are typically due on April 15th each year. By requesting an extension, you can extend your deadline for filing your taxes by six months. Regardless of whether your extension is approved, you must still pay your tax bill by the required deadline.
If you do not pay your taxes by the deadline, you will owe back taxes.
How late can you file back taxes?
You can file back taxes for however many years you missed. However, a refund might not be available if you file more than three years after the due date.
Generally, the IRS prefers you to complete all back tax returns for years that have not yet been filed. Nevertheless, the IRS generally only requires you to file the last six years of tax returns in order to be considered in good standing. However, the IRS can go back more than six years in some cases. When you pay off your six most recent years of taxes, you may be in good standing with the IRS, but it is best to consult a tax relief professional or the IRS first.
Unfortunately, there is a limit to how far back you can file a tax return to claim a refund or a tax credit. You can only claim refunds and tax credits within three years of the original due date of your tax return. In the event that you do not file within three years of the due date, you will likely owe even more taxes, as you cannot claim the tax credits you might otherwise be entitled to.
How to File Tax Returns for Previous Years
Filing your tax return for a previous year isn't as difficult as you may think, but there are a few steps to follow.
If you intend to prepare your own tax returns, you should use an easy-to-use and reliable tax preparation program. Each tax return you need to file will take you a few hours to complete. As always, make sure to use the proper accounting software and forms for the appropriate tax year. Each year's regulations differ, and the software settings can significantly affect your compliance and liability.
Hiring an experienced tax professional might be a better alternative because they can assist you with more complicated tax compliance and deal with the IRS if needed.
If you decide to hire a professional, look for someone with significant experience preparing back taxes. An experienced professional can assist you if you need advice on handling incomplete tax paperwork, or negotiate with the IRS on your behalf.
You should begin by gathering any information from the year in which you want to file a tax return. Compile your W-2s, 1099s, and information regarding any deductions or credits you may be entitled to. Be sure to use the correct tax forms for the year of the tax return you're filing.
Request Tax Documents From the IRS
For some, finding documents from previous years may be a challenge. You can fill out a form from the IRS to find out what tax information is on file for you for a particular year.
Using Form 4506-T, you can request a transcript of your tax return information, even if you haven't filed a tax return. Information from the last ten years is available.
The IRS will send all the information in their records, including information on W-2s, 1099s, and 1098s. However, there will be no information about deductions and credits you may qualify for, so you will still need to research them yourself.
Complete and File your tax return
Be sure to use the tax forms from the year you are filing once you have all the necessary forms. To file a 2019 tax return, for example, you need 2019 tax return forms. The IRS website has these forms. When completing a tax return by hand, patience is essential.
If you want to lower your taxes, you should consult an accountant or tax advisor. It's possible you forgot some items you can write off, like business expenses. By talking to a tax advisor, you may be able to brainstorm some tax credits and write-offs that may be available to you.
Select a Payment Plan
It is possible to pay all your back taxes at once if you use the direct payment feature on the IRS website. Please note that if you pay with a credit card, you may be charged additional fees.
You do not, however, need to pay everything at once.
If you owe less than $50k in back taxes, you can create an installment agreement giving you 72 months to pay. In general, if you owe $10k or less, the IRS will likely allow you to set up a repayment plan.
If you cannot repay the full amount, you can also explore the possibility of an offer in compromise. If you choose this route, you'll most likely need the assistance of an expert, such as a tax lawyer.
Why You Should File Back Taxes
By filing back tax returns you haven't completed, you may be able to:
1. Claim a Refund
Filing a back tax return is one way to find out if the IRS owes you a tax refund. Many Americans have federal income taxes withheld from their paychecks, but sometimes too much is withheld. An effective tax return could result in a refund that puts more money in your pocket.
2. Stop Penalties and Interest
Even if you can't pay the balance you owe, it is important to file your tax return on time to avoid penalties. For each month your tax return is late, you may have to pay an additional 5% of the unpaid tax you are required to report. There are also minimum penalties.
Taxes owed are subject to another penalty if you do not pay them. If you don't pay what you owe on time but file your return on time, you'll be charged an additional 0.5% of the amount of the tax not paid on time for each month or part of a month that you are late. As a result, you will accrue fees until the balance is paid in full or the penalty reaches 25%, whichever occurs first.
Overdue taxes also accrue interest. Unlike penalties, interest continues to accumulate even after a given time period has passed.
3. Qualify for Social Security Benefits
Individuals who are self-employed are responsible for paying Social Security taxes through their estimated tax payments. In order to qualify for Social Security retirement and disability benefits, you must file a return and pay the associated taxes.
Can I still get my tax refund if I’m filing back taxes?
If the return is filed within three years of the original due date, then yes. Tax credits like the Earned Income Tax Credit (EITC) are also subject to this time limit.
In order to take advantage of the tax credits and deductions that can significantly reduce your tax liability, you should consider filing within this three-year window in order to get the refund and tax breaks you are entitled to.
What Happens If I Don’t File Back Taxes?
Past-due tax returns should be filed as soon as possible if you owe back taxes. You will incur penalties on the amount you owe if you don't file or pay your taxes on time. Penalties can include the following:
Failure to File Penalty
The IRS imposes a penalty of 5% of your unpaid taxes if you miss your deadline for filing and do not file an extension.
There will be an additional 5% charge every month for up to five months. In addition, if a return is filed more than 60 days after the due date, it will be subject to an additional late filing penalty.
Failure to Pay Penalty
Late fees are imposed by the IRS for each month a payment is not made by the deadline.
A failure to file penalty of 25% is also possible; however, interest continues to accrue until your tax liability is paid in full.
Helpful Resource: What happens if you don't pay your taxes?
What If I Can’t Afford to Pay Back Taxes?
Taxpayers who are unable to pay their tax liabilities have several options available to them. If you owe back taxes, it's up to you to contact the IRS. Until you pay your taxes, the IRS will continue to charge you interest.
In this case, taxpayers should contact a qualified tax professional who can assess their situation and make recommendations. Getting help as soon as possible is key to limiting penalty charges and interest accruals.
Consequences of Owing Back Taxes
Most people must file their tax return and pay their full tax liability by the April 15 deadline each year. If you fail to file your taxes and pay them by the deadline, you owe back taxes.
If you file and pay your taxes late for a reasonable reason, you won't be penalized. The IRS will accept reasonable cause, such as a fire that destroyed your records or a death in the immediate family. Failing to file past due taxes can result in both legal and financial consequences.
If you owe back taxes, you may encounter the following issues:
Interest and Penalties
Taxes that are overdue accrue interest and penalties quickly. You can be assessed a minimum of $205 and a maximum penalty of 25% of the amount of taxes owed, plus interest, if you file more than 60 days after the due date. There is just one penalty involved here. You may be penalized from 0.5% to as much as 25% of your unpaid taxes per month for late payments.
Forfeiture of Your Tax Refund
Taxpayers who believe they have overpaid their taxes are generally not overly concerned about filing their tax returns. However, IRS refunds are only available for a limited period of time.
In general, the IRS refuses to issue refunds for overpaid taxes after three years because it considers them a "contribution" to the United States Treasury.
You will receive a notice from the IRS as soon as your taxes are past due. A tax lien will be filed against your property if you don't pay within 10 calendar days of receiving the notice. If you don't pay, the IRS may seize your assets.
Revocation of Your Passport
It is possible for the Secretary of State to revoke your passport if you haven't filed taxes for a number of years or if you owe more than $53,000 in back taxes.
This is an extremely rare occurrence and does not happen as popular myths portray. However, avoiding IRS notices or evading your tax obligations may ultimately result in a crime.
How to Get Expert Help with Back Taxes?
There's no need to feel overwhelmed, confused, or anxious about your back taxes. Many resources are available to help you file your unfiled tax returns.
It is possible to file late returns on your own, but if you want to resolve the problem properly, you should hire a professional. IRS officials scrutinize back tax returns even more closely than they do on-time returns. The IRS will likely notice mistakes on your returns and assess an increased bill if there are any errors.
If you have a past-due return, a tax professional can help you complete it, resolve any issue related to compliance, and contact the IRS.
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