Owing back taxes is an issue that affects millions of Americans every year. More than 30 million people will owe money to the IRS in 2019 (representing 21% of all taxpayers). If you are included in this number, you should take immediate steps toward resolving your tax burden. Unpaid taxes can easily accumulate penalties and interest over time. Also, a seemingly small amount can increase quickly, making paying it difficult to manage.
Falling behind on your taxes is much easier than you may think. Indeed, personal challenges such as illnesses, divorce, or even the death of a loved one cause people to fall behind on their tax obligations. Also, business owners may encounter challenges (such as low income or other forms of debt) that cause them to default on their taxes.
Individuals and businesses should always remember that paying back taxes is a top priority. Defaulting on your taxes can result in many different consequences moving forward.
Why you might owe back taxes to the IRS
There are many cases where both individuals and businesses end up owing back taxes. Understanding some of these reasons can help you remain in control of your tax burden in the future.
- Failing to file
The most common reason why individuals and businesses owe back taxes is that they didn’t file their returns during a particular year. As required by law, all people (and companies) that earn a specific amount of income are required to report such income to the IRS. This is done in your tax return, which will be reviewed to determine how much tax you should pay.
The legal requirement is that an individual earning $10,000 or more ($20,000 for married couples filing jointly) should file a tax return every year. (This threshold changes as tax laws change each year.) Failure to file will typically result in past due taxes and penalties. More complex laws apply to businesses.
- When your employer withholds too little from your paycheck
Most individuals have income taxes automatically withheld from their paychecks. However, there are cases where an employee may apply for too many exemptions and tax breaks. The result is that your income tax may be under-withheld, causing you to owe the remaining balance to the IRS.
This concept can also apply to businesses. If the IRS finds that your business tax amount is lower than it should be, they may require you to pay the remaining balance within a specific timeframe.
- Back taxes when you’re self-employed
Businesses (and self-employed persons) also face unique challenges when it comes to paying taxes. Because such entities are individually responsible for remitting taxes to the IRS, they may easily default in tax payment during a particular period. It only takes one missed quarterly payment to end up with back taxes owed to the IRS.
How to resolve paying back taxes
If you owe back taxes, you’re not alone. 2 in every 10 taxpayers will owe money to the IRS in 2019. The key to resolving your tax burden is to start early and to seek professional assistance.
There are many options available to you when resolving this issue. From installments to payment plans and even compromises, you can find a resolution that will help you avoid costly penalties and fines. Here are some available options to consider.
The IRS is often willing to work with taxpayers in resolving their back taxes. In recent years, more flexible terms have been introduced to help you sign up for a payment plan that fits your budget. You now have the option of breaking up the amount you owe into smaller installments that you can pay over time.
IRS payment plans include the following:
- The IRS Fresh start program
For taxpayers who owe up to $50,000, you can split the past due amount into regular installments. The amount can be paid over a period of 72 months without the need for any financial documentation.
For entities that owe $25,000 to $50,000, the payments must be scheduled through direct debit or via a payroll deduction.
- The Full pay agreement
The full pay agreement is an option availed to people who need more time in eliminating back taxes. This option gives you a maximum period of 10 years to gradually pay off the amount owed.
The IRS will typically set up a pre-determined payment schedule to help you satisfy your debt. Because some payment plans will be scheduled based on your income and expenditures, you may be required to submit appropriate financial documentation when applying for this option.
Another option you have available when paying back taxes is an offer in compromise (OIC). OICs are essentially agreements that you reach with the IRS to settle past due taxes for less than the full amount owed. The IRS offers this option because it may be their best alternative in recovering as much of the debt amount as possible. Indeed, lengthy payment plans may result in taxpayers defaulting and taking too long to settle the back taxes owed.
When determining how much you’ll need to pay, the IRS will consider your assets, income, and other forms of equity. Qualifying for an OIC is also a complicated process that works best with the help of tax resolution professionals.
Penalties can easily raise your tax burden to unaffordable amounts. A single failure to file your tax return can cause you to incur 25% in penalties (of the original amount owed). If penalties on the past due amount were to be lowered, your entire tax burden would also significantly reduce.
There are several ways you can qualify for penalty abatements from the IRS. For example, first-time defaulters may receive first-time penalty abatement. This abatement helps people who have a good history of complying with previous taxes owed- but ended up defaulting due to circumstances beyond their control (such as the death of a loved one, financial hardship, or natural disasters).
A tax resolution specialist can help you in applying for penalty abatements to reduce your overall tax burden.
How we can help with your tax related issues
Paying off back taxes to the IRS sounds easier than it is. Small tax debt can easily escalate into more substantial amounts due to penalties, fines, and accumulation over time. With a tax resolution professional by your side, you can work toward reducing your taxes in many ways. For example, you can reduce your tax burden by setting up an IRS installment agreement; an IRS Offer in Compromise (OIC), or via a simple payment plan.
At True Tax Resolve, we work closely with both individuals and businesses to help them in paying back taxes in full. Need professional assistance with resolving your taxes? Contact us today.