Back taxes can be a source of financial stress and worry for anyone, from low income Americans to the wealthy. Whether you've received a notice or know you owe unfiled taxes, it’s essential to understand how back taxes work and what steps you can take to avoid financial ruin. Fortunately, the Internal Revenue Service (IRS) offers several programs to help taxpayers set up a payment plan or take advantage of tax forgiveness. In this blog, we’ll dive into what back taxes are, how they can impact your financial future, and how to work with the IRS to set up a payment plan.
Back taxes are unpaid federal or state taxes from prior years. These taxes can include income taxes, self-employment taxes, and payroll taxes. If you don’t file a return, the IRS will file a Substitute for Return (SFR) on your behalf. This will calculate your tax liability based on the information that the IRS has available on you, which can include wages, interest, and other financial information.
Owing back taxes can be a significant burden on your financial future. The IRS has a variety of ways to collect payment, including wage garnishment, bank account levies, and property liens. These actions can seriously impact your credit rating and your ability to obtain loans, credit cards, and other financial products. The longer back taxes go unpaid, the more interest and penalties will accumulate, making it increasingly difficult to pay off the debt.
The best way to avoid collections and penalties is to work with the IRS to set up a payment plan. The IRS offers several options, including a short-term payment plan of 120 days or less, a long-term payment plan of more than 120 days, or an Offer in Compromise (OIC). The OIC is a settlement of the tax debt for less than the full amount owed. It’s essential to contact the IRS as soon as possible to discuss your options.
The IRS also has several programs available to help taxpayers who may be experiencing financial hardship. The Currently Not Collectible (CNC) status is a status that the IRS grants to taxpayers who are experiencing a significant financial hardship. It suspends the collections process for a specific amount of time. The IRS may also grant a temporary delay in collections, known as an Installment Agreement with Partial Payment (IA). You must meet certain qualifications to take advantage of these programs, but they can offer a way out of a potentially difficult financial situation.
Back taxes may seem daunting, but there are several options available to help you resolve the issue, including setting up payment plans and taking advantage of the IRS’s forgiving schedules. If you’re having difficulty paying your taxes, don’t ignore the issue and hope it will go away. Reach out to the IRS and discuss your options. By taking the appropriate steps, you can get back on track to financial freedom and avoid the long-term consequences of unpaid taxes.