What are “Back Taxes”?
Unpaid tax obligations also known as “back taxes” arise when individuals or businesses fail to pay their tax obligations on time. This can occur for various reasons, including financial difficulties, oversight, or misunderstanding of tax laws. Not paying taxes by the due date results in the accumulation of unpaid taxes, which can lead to significant consequences.
Causes of Unpaid Taxes
- Financial Hardship: Individuals or businesses may face periods where they
cannot afford to pay their taxes due to economic challenges. - Filing Errors: Mistakes in tax filings, whether unintentional or due to lack of
understanding, can lead to incomplete or incorrect tax payments. - Deliberate Evasion: In some cases, back taxes accrue because of intentional
efforts to avoid paying taxes.
What about as a result of Govt regulatory changes??
Consequences of Unpaid Taxes
- Penalties and Interest: Tax authorities, such as Federal (US Department of Treasury
Internal Revenue Service (IRS)) or State (Department of Revenue) or Local
Municipality, typically charge interest and penalties on the amount owed, increasing the
total debt over time. - Liens and Levies: If back taxes remain unpaid, the tax authority may place a lien on a
taxpayer’s assets or levy their property, including bank accounts and wages.
Tax Resolution Options
Taxpayers with back taxes have several options to resolve their tax debt:
- Payment Plans: Many tax authorities offer installment agreements that allow taxpayers
to pay back their taxes over time. - Offer in Compromise: This is an agreement with a tax authority to settle a tax debt for
less than the full amount owed, available under certain circumstances. - Temporary Delay: Tax authorities may grant a temporary delay of collection until the
taxpayer’s financial situation improves.
Understanding and addressing unpaid taxes is crucial to avoid escalating debts and legal
consequences. Taxpayers should consider consulting with tax professionals to explore
their options for resolution and ensure compliance with tax laws.
How Far Back Can You File Back Taxes
The ability to file previous year’s taxes at Federal, State, or Municipal level varies based on
specific tax regulations in place. At the Federal level, for example, there’s no limit on
how far back you can file back taxes, but there are important considerations:
- Refunds: If you’re filing a past tax return and expect a refund, you must file the return
within three years of the original due date to claim your refund. After this period, any
refund amount typically cannot be claimed. - Collections: The Internal Revenue Service (IRS) generally has up to 10 years to
collect outstanding taxes from the date they were assessed. This is known as the
Collection Statute Expiration Date (CSED). After this period, in most cases, the IRS
cannot pursue collection. - Filing Requirement: If you owe taxes, it’s generally advisable to file all past due
returns as soon as possible, regardless of how late they are. This can help reduce
potential penalties and interest, and also establish a plan for resolution.
How to File Back Taxes
Filing back taxes can be a crucial step in resolving tax issues and preventing further
penalties and interest. Here’s a general guide on how to file back taxes:
Gather Your Documentation
- Tax Returns: Collect all relevant tax documents needed to file your returns. This
includes W-2s, 1099s, receipts, and any other documentation related to income and
deductions. - Missing Documents: If you’re missing documents, you can request copies from your
employer, or you can request a wage and income transcript from the IRS or your local
tax authority, which shows data from forms like W-2s and 1099s.
Obtain Past Tax Forms
- Tax forms change from year to year. It’s important to use the tax forms for the
specific year(s) you are filing. You can usually download past tax forms from the website
of your tax authority (e.g., IRS.gov for U.S. federal tax forms).
Fill Out Your Tax Returns
- Complete each tax return for each year you missed. Ensure accuracy to avoid
further issues or the need for amendments later.
Calculate Penalties and Interest
- If you owe taxes, you will likely owe penalties and interest. The IRS and many other
tax authorities calculate penalties and interest for you once you file, but you can use
online calculators to estimate what you might owe.
Submit Your Tax Returns
- Mailing: Some tax authorities require that old tax returns be mailed in rather than e-
filed. Check the specific instructions for each tax year. - Electronic Filing: If available, electronic filing can be quicker. However, for very old
tax years, this option may not be available.
Arrange to Pay
- Full Payment: If you can, pay the full amount owed when you file to stop further
interest and penalties. - Payment Plans: If you can’t pay all at once, you might be able to set up a payment
plan with the tax authority. This can help manage the financial burden.
Consult a Tax Professional
- Back taxes can be complex, especially if multiple years are involved or if large sums
are owed. A tax professional, like an Enrolled Agent (EA), Certified Public Accountant
(CPA) or a tax attorney, can provide guidance, handle negotiations with tax authorities,
and help ensure that your filings are complete and accurate.
Stay Current
- After you’ve dealt with taxes for previous years, make sure to stay current with future tax
obligations to avoid repeating the situation.
By following these steps, you can effectively address the issue of back taxes and work
towards resolving any associated debts.
How and where to file back taxes online
Filing back taxes online depends on the specific tax authority’s procedures. Here’s how
to file back taxes online at the Federal level using the IRS system:
Determine Eligibility for E-Filing
- Generally, the IRS allows you to e-file tax returns for the current year and up to three
years back. If you need to file for older years, you’ll likely have to mail in your tax
returns.
Gather Necessary Documents
- Before you begin, ensure you have all required documents such as W-2s, 1099 forms,
and any relevant financial records for deductions or credits.
Use IRS Free File or Commercial Software
- IRS Free File: If your adjusted gross income is below a certain threshold, you can use
IRS Free File to prepare and file your federal back taxes for free. - Commercial Tax Software: Many commercial tax software programs offer the ability to
file back taxes for recent years. Check compatibility for the specific tax year you need to
file. Examples include TurboTax, H&R Block, and TaxAct.
Prepare Your Tax Return
Using the chosen platform, fill out your tax return for the specific year. Make sure to
use the forms for the correct tax year, as tax laws and forms can change from year to
year.
Submit Your Tax Return
Follow the software’s instructions to e-file your back taxes. If you’re using IRS Free
File or a service that supports it, the software will guide you through the submission
process.
How Do You Pay Taxes Owed
If you owe taxes, you can pay online using IRS Direct Pay, which allows you to pay
directly from a checking or savings account, or through the Electronic Federal Tax
Payment System (EFTPS). You can also use a credit or debit card.
Confirm Receipt
After filing, you should receive confirmation from the IRS that your return has been
accepted. If there’s an issue, the IRS will notify you, and you may need to address any
errors and resubmit.
In all cases, if you’re unsure about the process or your specific tax situation, it’s
beneficial to consult with a tax professional. They can provide guidance specific to your
needs and help ensure that your tax returns are filed correctly.
Will IRS Negotiate Back Taxes
Yes, the IRS may negotiate back taxes under certain conditions, offering several options
to taxpayers who are unable to pay their taxes in full. Here are some of the primary
methods through which the IRS can negotiate back taxes:
- Installment Agreement
The IRS offers payment plans, known as Installment Agreements, which allow
taxpayers to pay their tax debt over time. These plans can be short-term (paying within
120 days) or long-term, depending on the amount owed and the taxpayer’s ability to
pay. Setting up an installment agreement can typically be done online through the IRS
website, provided the taxpayer meets certain criteria. - Offer in Compromise
An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for less than the
full amount owed if paying the full debt would cause financial hardship, if there’s doubt
as to the liability (i.e., uncertainty whether the assessed tax is correct), or if there’s
doubt that the full amount can be collected. The IRS considers the taxpayer’s income,
expenses, asset equity, and ability to pay when determining eligibility for an OIC. - Currently Not Collectible Status
If a taxpayer cannot pay their taxes due to financial hardship, the IRS may declare their
account Currently Not Collectible (CNC). While this does not forgive the tax debt, it
temporarily suspends collection activities until the taxpayer’s financial condition
improves. - Penalty Relief
Taxpayers may qualify for penalty relief if they have a reasonable cause for not meeting
their tax obligations. This doesn’t eliminate the tax owed, but it can reduce the total
amount payable by removing assessed penalties.
Procedures for Negotiation
- Documentation: Be prepared to provide thorough documentation of your financial
situation, including assets, income, expenses, and other debts. - Application: Each relief option requires a specific application process, which can be
found on the IRS website. - Professional Help: Considering the complexity of tax laws and negotiations, consulting
with a tax professional (like an Enrolled Agent (EA), a CPA or tax attorney) can be very
beneficial. These professionals can help navigate the IRS’s procedures, maximize the
likelihood of a favorable outcome, and ensure that all paperwork is completed
accurately.
Negotiating with the IRS can provide significant relief to taxpayers who are struggling
with back taxes, but the process involves strict criteria and thorough documentation.
Can You Still have deductions on Back Taxes
Back taxes themselves are not deductible. When you pay back taxes, you’re essentially
settling a past debt owed to the tax authority. Here’s a breakdown of how this works and
what aspects might indirectly affect your taxes:
Non-Deductibility of Unpaid Taxes
- Principal Amount: The principal amount of the tax originally owed cannot be deducted from your income.
- Penalties: Any penalties paid on the back taxes are not deductible. These penalties
are considered punitive and are therefore not eligible for tax relief. - Interest: Similarly, the interest paid on back taxes is also non-deductible. This interest
is viewed as a charge for the late payment of a debt and does not qualify as a business
expense or investment expense.
Tax Considerations for Businesses
- Business Taxes: While the penalties and interest on business-related tax liabilities (like
payroll taxes) are also non-deductible, the original tax liability represents a business
expense. Thus, if a business failed to deduct the appropriate expense in the year it was
incurred (such as payroll expenses), correcting this in a later year can adjust the
business’s taxable income, though it does not change the deductibility of the back
taxes, penalties, or interest themselves.
Tax Deductions and Credits
While you cannot deduct back taxes, penalties, or interest, you should continue to take
advantage of all other applicable tax deductions and credits in the years you file. These
can reduce your taxable income and potentially decrease the overall tax burden for
those years.
Are Back Taxes Public Records
Unpaid tax liabilities, are typically not public records in the sense that the
general public cannot access details about an individual’s or business’s tax debts
directly from tax authorities like the IRS. However, there are a few circumstances under
which information about unpaid taxes might become publicly accessible:
- Tax Liens
If the IRS or another tax authority places a lien on a property as a result of unpaid taxes,
this lien becomes a matter of public record. Tax liens are filed with local or state records
offices and can be accessed by the public. These liens indicate that the tax authority
has a legal claim to a taxpayer’s property until the debt is cleared. - Court Cases
If there are legal proceedings involving tax disputes, such as lawsuits or bankruptcy
filings related to tax debts, the details of these cases, including any information about
back taxes, may become part of the public court records. - Property Taxes
Information on unpaid property taxes is often available through local government offices
or online databases. Since property taxes are assessed by local jurisdictions, any
delinquencies typically become a matter of public record, accessible through county or
municipal offices. - Business Taxes
For businesses, certain tax issues may become public through regulatory filings or
when they impact a company’s financial statements or disclosures, especially for
publicly traded companies.
Privacy Concerns of Tax Records
Tax authorities like the IRS are bound by strict privacy laws, such as the U.S. Taxpayer
Bill of Rights, which protects the confidentiality of tax return information. They do not
make individual tax records, including information about unpaid taxes, publicly
accessible without the taxpayer’s consent unless required by law through the situations
described above.
Understanding when and how tax information might become public is important for
maintaining privacy and managing financial or legal implications associated with unpaid
taxes. If concerned about the public disclosure of tax-related information, it is advisable
to consult a tax professional or legal advisor to understand the relevant laws and take
appropriate steps to resolve any tax liabilities.
Can Back Taxes Be Discharged in a Bankruptcy
Yes, under certain circumstances, back taxes can be discharged in a bankruptcy, but
the rules are complex and vary depending on the type of bankruptcy filed (such as
Chapter 7 or Chapter 13 in the United States) and the type of tax owed. Here are the
general criteria that must be met for taxes to be dischargeable in bankruptcy:
- Type of Tax
Income taxes can potentially be discharged in bankruptcy, but other types of taxes, such
as payroll taxes or fraud penalties, generally cannot be. - Three-Year Rule
The tax debt must be related to a tax return that was due at least three years before the
taxpayer files for bankruptcy. This includes any extensions. - Two-Year Filing Rule
The tax return must have been filed by the taxpayer at least two years before the
bankruptcy filing. This rule ensures that the taxpayer did make an effort to comply with
tax filing requirements, even if the taxes were not paid. - 240-Day Assessment Rule
The tax debt must have been assessed by the tax authority at least 240 days before the
bankruptcy filing, or must not have been assessed yet. This rule typically covers
situations where additional taxes were assessed following an audit. - No Fraud or Willful Evasion
The return must not have been fraudulent, and the taxpayer must not have been guilty
of willful tax evasion. If the IRS or another tax authority proves fraud or evasion, the tax
debt is not dischargeable.
Application Of Unpaid Taxes For Different Bankruptcy Chapters
- Chapter 7 Bankruptcy: Allows for the discharge of eligible debts, including some back
taxes, following the liquidation of non-exempt assets. - Chapter 13 Bankruptcy: Involves a repayment plan over three to five years. While
some taxes may be discharged at the end of the repayment period, Chapter 13 typically
prioritizes the repayment of tax debts.
Which Tax Debts are Non-Dischargeable
Some tax debts are not dischargeable in bankruptcy, including:
- Taxes for which no return was filed.
- Taxes associated with returns filed late (within two years of the bankruptcy filing).
- Trust fund taxes (like payroll taxes).
- Taxes related to fraud or willful evasion.
Legal Advice
Due to the complexities involved in discharging taxes through bankruptcy, consulting
with a bankruptcy attorney or a tax professional who understands both tax law and
bankruptcy law is highly recommended. They can provide guidance specific to individual
situations, help navigate the legal requirements, and optimize the outcome of the
bankruptcy process concerning tax debts.
