Paying taxes can be a challenge, especially since you need to settle them on time. While every taxpayer should always try to keep their tax dues up to date, there are instances when some fall behind on their taxes. As a result, they incur back taxes.
Dealing with such a situation can be a serious problem if you don’t have the means to settle your back taxes before the deadline. On top of the pending tax due, interest and penalties also add to your tax liability.
Thankfully, there are ways to resolve the situation. Read on to learn about how you can settle your back taxes. But first, let us discuss what back taxes are and how they are incurred.
What are Back Taxes?
Back taxes are taxes that were left fully or partially unpaid in the previous tax year when they were due.
American taxpayers fall behind on their taxes due to various reasons like forgetting to pay the tax liability after filing a return, not reporting all income earned during the tax year, or failing to file a tax return altogether.
The Internal Revenue Service (IRS) regularly charges interest and penalties against the pending back taxes until you completely clear the amount. You could incur back taxes on a local, state, or federal level.
What Happens If You Don’t Pay Your Back Taxes?
Ignoring your back taxes is a big mistake you might regret later on. Here are the possible consequences you can face if you fail to pay your tax obligations on time.
Penalties will apply
The IRS will charge a late payment penalty of 0.5% against your account on the tax owed based on your account status. This is applied to each month the tax remains unpaid.
Interest will accrue
If you continue not to take action after multiple warnings, the IRS will begin to charge interest on your unpaid taxes. Regardless of any extension of time to file, the interest compounds daily from the due date of the tax return. The interest rate for individual taxpayers is the federal short-term rate plus 3%. The former is adjusted every three months.
The IRS may seize or levy your assets
A tax levy gives the IRS authorization to take hold of your assets. This is going to offset any tax debt that you owe. In particular, the IRS can seize your wages, bank accounts, vehicles, and real estate property.
The IRS may place liens on your property
A tax lien is imposed on your assets before a levy is enforced. If left unattended, this will grant the IRS claim over your properties, financial accounts, and businesses.
The IRS may garnish your wages
If you continue to ignore warnings from the IRS, they may also claim your wages to pay off your tax debt. Unless you make a strong contest, appeal, or tax resolution, the IRS will withhold your paycheck until you settle your back taxes.
6 Ways to Settle Back Taxes
You have various options to settle back taxes depending on your financial situation. Here are some of the common arrangements you can make with the IRS.
1. Apply for an IRS payment plan
- Short-term (180 days)
If you can’t pay your tax debt due to financial hardship, you can apply for a short-term payment plan with the IRS. The IRS will grant this to taxpayers who meet their set requirements.
However, you can only have 180 days to settle your back taxes. In addition, interest and applicable penalties will be charged against the balance until the full amount is paid.
- Installment agreement
The installment agreement is an alternative payment plan you can avail of to gain better flexibility over your tax payments. At most, you will have three years to settle your tax debt through any of the various installment plan arrangements offered by the IRS.
These include the guaranteed installment agreement, streamlined and non-streamlined installment agreements, and partial payment installment agreement.
2. Propose an offer in compromise
An offer in compromise (OIC) is an agreement between you and the IRS to settle your back taxes at a reduced amount. However, if you have availed yourself of an installment agreement or other IRS payment plans, you won’t likely qualify for an OIC.
Also, the IRS only accepts an OIC for the following reasons:
- When there is doubt regarding the existence of back taxes or the correct amount of your tax debt
- When your tax liability is higher than the value of your assets and income
- When there is no doubt that you legally owe back taxes and that the full amount can be collected, but full payment would either create an economic hardship or would be unfair because of exceptional circumstances
3. Apply for “currently not collectible” status
When the IRS tags your account as “currently not collectible,” the collection of back taxes from you will be delayed until your financial condition has improved. However, penalties and interest will still apply until you settle your tax debt.
While you’re in such a status, the IRS will still review your capability to pay your back taxes. They may also file a Notice of Federal Tax Lien on your assets to offset the payment of your tax liability in case you fail to settle it.
4. Take out a personal loan
For some taxpayers, taking up a loan can be the most suitable option to quickly settle back taxes. A loan can be considerably lesser than the amount you’ll have to pay for an IRS payment plan given the additional application fees, interest, and penalties.
5. Pay with a credit or debit card
Paying your back taxes using a credit or debit card can be an alternative option if you want to settle your tax liabilities immediately. This is most effective if you are a new cardholder or use a card with a 0% annual interest rate. However, be sure to pay the card balance in full before the end of the introductory period to prevent accruing high monthly interest.
6. Work with a tax relief specialist
Tax issues can be so overwhelming and challenging that handling them on your own becomes impossible. In this instance, you can turn to a tax relief specialist to help you manage the situation.
But before allowing them to handle your tax case, be sure to verify if they are qualified and experienced enough to give you a favorable outcome.
Settling Your Tax Problem
Running into a tax problem can be difficult. If you find yourself in this situation, you must address the issue promptly instead of ignoring it. This way, you won’t fall into a deeper financial trap with all the interest, penalties, and additional fees that come with delayed payment.
If you need a tax resolution expert to settle your tax problem, contact us at Peace of Mind Tax Help. We have a team of skilled tax negotiators who can help minimize your tax liability.
Contact us today to learn more about our tax negotiation services!