Unpaid Back Taxes: What to Do If You Owe the IRS

Unpaid taxes can be overwhelming enough to take over your entire life. This is understandable. After all, the IRS can come for your assets, bank accounts, and wages.

It’s never a comfortable position to be in. 

If you have issues with your taxes, your concerns are valid. However, more important than being concerned is taking action, because the longer you bury your head in the sand, the worse matters can get. 

However, the IRS, vicious as it can be, has one redeeming factor: it’s always open and willing to work with taxpayers on resolving their tax problems. 

If you owe back taxes, all is not lost. Learn everything you know about this here. 

What Are Back Taxes?

You are supposed to pay taxes every year. When you fail to do so or make a partial payment, you end up with outstanding balances on your taxes, known as back taxes. 

Taxpayers can have back taxes at the federal and state level, and these accumulate interest and penalties regularly. So, the longer you don’t settle your back taxes, the larger your outstanding tax bill becomes. This is one of the reasons why ignoring your taxes, or IRS notices makes for a terrible idea. 

But Why Do People Have Unpaid Taxes?

There are numerous reasons why people end up with back taxes. These include:

• Filing returns but not making the actual payments. This can be because of illness, financial hardship, the death of a loved one, or an oversight, name it. 
• Failing to pay a tax as assessed by the IRS. This comes about in two ways. The IRS can modify your returns and give you a revised figure, or file a substitute return if you fail to file. 
• You have not filed a return nor paid the taxes due.

What Will Happen With My Unpaid Taxes?

The IRS does not place levies and liens overnight. 

So, for example, if you failed to file and the IRS filed a substitute return, it sends you an assessment to notify you of what you owe. You can concur with the assessment and pay or request a payment plan. 

You can also disagree with the assessment, at which point you need to appeal within the provided timeline. The IRS will send you collection notices if you don’t pay or appeal. 

These notices will be friendly initially, but the wording gets gradually stern if you keep failing to act against them. And the IRS has the stamina to keep coming. 

Eventually, depending on your outstanding tax bill, the IRS will send a final notice and intent to levy. This means the IRS is ready to enforce collections actions against you, including wage garnishment and levying your assets.  

If you have not responded to the IRS for whatever reason, and you get the intent to levy, it’s time to talk to a tax attorney. 

Penalties for Unpaid Taxes

Owing taxes can be very stressful, especially when you are financially unable to do so. However, you are unlikely to face criminal charges. The likeliest outcome is penalties and interest. 

These can graduate to asset seizure and tax liens. Note that enforcement action depends on the outstanding balances and your tax compliance history. 

Let’s take a more in-depth look at the consequences of tax non-payment. 

Failure to File Penalty

If you fail to file, the tax can apply a failure-to-file penalty. This can be anywhere between 5% and 25% of the tax amount due. There is a but…

If you have failed to file for fraudulent reasons, the minimum penalty goes from 5% to 15%. 

Word of advice; even if you can’t pay your taxes by the deadline, file your returns, or at the very least, file for a six-month extension. Within this time, you can actively look for ways to pay your taxes or contact the IRS for a payment plan. 

Failure to Pay

You get the failure-to-pay penalty when you file a return but don’t pay. This is 1% of the owed amount. With over two years of non-payment, this goes up to 25%. 

The failure-to-file penalty is 5% to 25% of the amount owed, while the failure-to-pay penalty is 1%. You save yourself a significant amount of cash by filing, even when you don’t have the funds to pay just yet.

So once again: always file your returns, then work out the payments later.

Interest

Interest on unpaid taxes is applied from the day it falls due to the day you make the full payment. The rate charged is the federal short-term rate plus 3%. 

This interest keeps accruing even after entering a payment plan with the IRS.

Tax Lien

These come before levies and are legal claims against an individual’s or business assets. Generally, a lien serves as a guarantee to guarantee payment for the outstanding taxes. If payment is not forthcoming, the IRS can proceed with seizure. 

Tax Levy

This is when the IRS resorts to bank account seizure, wage garnishment, or levying other assets. 

Back Taxes penalties Depending on How Much You Owe

The consequences of unpaid taxes can depend on the amount owed in taxes. To mitigate losses, the IRS tends to come down much harder on people with substantial unpaid tax bills. 

So how much should you expect to be fined going by how much you owe?

Less Than $25,000

With less than $25,000 in unpaid taxes, you qualify for an installment plan where you make monthly payments. 

$25,000 To $50,000

Typically you can get an installment plan when you owe $25,000 to $50,000 on your taxes. For this to happen, however, you must agree to a payroll deduction or direct debit from your bank. 

Without this, you must fill in a form providing details about your finances. The IRS will use this information to determine whether it should extend the payment plan or not. 

Over $50,000

The only way to get a payment plan when owing over $50,000 is by providing full financial disclosure to the IRS. With this much in unpaid taxes, the IRS can also apply other collection tactics and confiscate your passport.

I Have Unpaid Taxes: Where Do I Start?

If you take the initiative to settle your back taxes, resolving them becomes much easier. 

Here are some things you can do. 

File Unfiled Returns

Start from the beginning by filing any missed returns. This will tell you how much you owe. 

Determine Your Tax Debt

Because of the late penalties and interests allowed, filing a return alone doesn’t always give you your total liability. 

To get exact figures, contact the IRS to give you the total breakdown. If you have received any noises from the IRS, the last notice should include the total amount you owe. 

Resolving Unpaid Taxes: What Are My Options?

The two steps above will tell you how much you owe, which is a good start. To complete the process, you must find ways to resolve the back taxes. 

Get Your Liability Written Off

Your liability can potentially be written off if you qualify for a Currently- not-collectible or hardship. You can also get softer payment terms and settlement, like an offer in compromise or an installment agreement. 

Wait For the Statute to Expire

The statute of limitations on tax collections is ten years. This would mean staying off the IRS’s radar for ten years, which is no mean feat. 

Request Innocent Spouse Relief

You can apply for this when you feel you should be exempted from a spouse’s or an ex-spouse’s unpaid tax liability. 

Request Penalty Abatement

Penalty abatement is where the IRS removes your penalties. The effect is that your outstanding tax amount is effectively reduced. 

Which Option Works Best?

Having a tax attorney on board allows an experienced professional to look at your tax issue in-depth. They can then advise on which resolution methods would produce the best outcomes for your specific circumstances. We do this at Cumberland Law Group and have helped Taxpayers successfully resolve their problems with the IRS. 

If you can’t wait to get your tax problems behind you, book an appointment with us, and we shall help you do just that.