United States citizens recently held more than $114 billion in debt from back taxes. When you have the Internal Revenue Service (IRS) sending you letters, it can be unsettling, to say the least.
The best thing you can do is face the issue head-on so that you can come up with a plan for handling it.
Here’s what you should know about taking care of back taxes.
What Are Back Taxes?
So, what are back taxes? The term refers to any tax balance that you have from a prior year. This includes taxes that you haven’t paid or those that you’ve partially or underpaid.
It includes any taxes you owe from prior years, or that are past due after the current filing deadline. IRS back taxes come in different categories, including:
- Past due taxes for a return you filed
- Penalties from failure to pay estimated taxes
- Adjustments made to taxes that weren’t calculated correctly
- Miscalculated or misreported property taxes
The IRS can collect from you for 10 years if you’ve filed returns, and indefinitely for any years in which you didn’t file returns.
How Do You Calculate Back Taxes?
Get clarity on exactly how much you owe in back taxes. Start by looking for copies of the returns for any years where you owe. Get your hands on digital copies or hard copies so that you have the answers that you need.
Look into the gross annual income and other line items on the return. When you have your records in order, it’s easier for you to get an accurate calculation of what you owe.
You may have to also factor in interest when you’ve held a balance for a while. The federal government sets back tax interest rates each quarter. They generally are set at 3% to 5% depending on whether you’re dealing with short-term or long-term back taxes.
How Can I Pay Back Taxes?
It’s important that you come up with a game plan for handling your past-due taxes. After you’ve calculated the cost, it’s time to figure out a game plan for how you can pay it back and how long it will take.
For most people, the best course of action will be to get on a payment plan. In most situations, the IRS wants to know that you are willing to cooperate and that you’re doing your best to pay it back.
If your balance is less than $25,000, you should have a straightforward process of setting up a payment plan online. During the application process, you’ll need to disclose your bank information and a breakdown of how much income you bring in each month.
From there, you’ll be able to lock in a monthly amount that you can pay over the course of the next few years.
If your balance is higher than $25,000 or you have a more complicated tax situation, you may not be eligible for a traditional installment agreement. The IRS may ask for a lump sum, an offer in compromise, or other types of arrangements that involve more detail and discussion.
What Are the Potential Penalties?
When your IRS back taxes start to add up, you are responsible for any penalties. Outside of the interest that adds up, you’ll also typically be responsible for a late payment penalty.
It’s also illegal to not file a return, so you could face penalties or further examination for that. The IRS also issues penalties for underpaying throughout the years.
You can also face penalties if your returns are shown to be inaccurate. You’ll need to get a hearing from the IRS before they can take any actions against you.
Once they take you to tax court and confirm that you owe a certain amount, the IRS might place a lien on your accounts. If you get a lien placed on your account, the IRS can garnish your wages, confiscate property, and deduct money from your bank account.
Should I Hire a Tax Planning Professional?
Getting the help of a tax professional can help you avoid many of the penalties that come with a tax case. There are legal professionals that specialize in tax court and can help you resolve your case.
They can provide tax resolution services that will get you the best possible outcome. Depending on your situation, they may structure an Offer in Compromise (OIC) or help you set up an installment agreement plan.
These professionals can negotiate on your behalf so that you can reduce the amount that you owe and get protection from any harsher penalties.
When you owe back taxes, you’re always outnumbered since you’re going against the resources that the government has. You’ll want the assistance of a legal professional that can protect your interests and make it easier for you.
Handle Your Tax Issues
These tips will help you take care of your back taxes. It’s a matter of getting accurate information and then coming up with a plan to handle them. The IRS isn’t an agency that you want to have the attention of.
The good news is that it’s not too late if you’ve fallen off track with the debt that you owe. We’re happy to help you take the first steps in righting this area of your life.
Bennett Financial can help you with all your tax needs. We’re skilled, transparent, and have the experience you need for any tax problem that you’re contending with. Use our form to contact us, or give us a call at (865)217-0244.