Back taxes refer to unpaid taxes that remain outstanding from previous years, either due to missed payments, underreporting of income or adjustments in tax filings after an audit. These unpaid balances can accrue penalties and interest over time, which may significantly increase the amount owed. Individuals or businesses with back taxes may face consequences from the IRS, such as wage garnishments, tax liens or even property seizures, depending on the severity and duration of the debt. A financial advisor or a tax professional could help you create a plan to avoid back taxes and manage your liability.
What Are Back Taxes?
Back taxes are taxes that remain unpaid after the original due date, typically resulting from underreporting income, omitting earnings from a tax return, underpayment or making errors in a tax filing.
Often, back taxes occur when taxpayers miscalculate deductions, credits or income, causing them to underpay unknowingly. They may also arise when a taxpayer fails to file altogether, due to oversight or the inability to pay the owed amount. When these issues are identified, either by the taxpayer or the IRS, the discrepancy leads to a back tax liability.
For example, imagine an independent contractor who earned additional income but forgot to report a portion of that amount on their tax return. If the IRS later audits the contractor's account and discovers the missing income, they will adjust the tax return to include this income. The contractor would then owe back taxes on the unreported amount, plus any interest or penalties that had accrued since the original filing.
How Do You Know If You Owe Back Taxes?
Taxpayers can find out they owe back taxes through several channels, most commonly through official IRS notifications. The agency regularly reviews filed tax returns and, if discrepancies are found, will mail a notice detailing the amount owed, including any interest or penalties. These letters often include deadlines and specific instructions on how to settle the debt. You should note that the IRS will never make first contact by phone, email, or social media.
Individuals who suspect they may owe back taxes but haven’t received a notice can check their tax status by accessing their IRS account online. The IRS website provides a secure portal where taxpayers can view past returns, see balances and identify any outstanding amounts. You can also call the IRS to find out at 800-829-1040.
Additionally, consulting past tax filings or contacting a tax professional can help uncover missed payments or overlooked income that might have led to an unpaid balance. Sometimes, state tax agencies may also notify individuals of back taxes, including property taxes, owed for state income taxes.
Consequences of Back Taxes
When a person owes back taxes, the IRS and, in some cases, state tax authorities can take actions to recover the debt. These consequences vary depending on the amount owed, the duration of the unpaid balance and whether the taxpayer has taken steps to address the debt.
Here are five possible repercussions of unpaid back taxes:
- Penalties and interest: The IRS adds penalties and interest to unpaid taxes, which accumulate over time and can significantly increase the total owed.
- Wage garnishment: In severe cases, the IRS can garnish wages, withholding a portion of the taxpayer’s paycheck until the debt is settled. The agency can also withhold future tax refunds or garnish Social Security benefits.
- Tax liens: The IRS may place a lien on a taxpayer's property, including real estate, vehicles and financial accounts, claiming a legal right to the assets as security for the unpaid debt.
- Property seizure: If other collection methods fail, the IRS can seize physical assets to satisfy the outstanding balance.
- Credit score impact: Although the IRS does not directly report to credit bureaus, unpaid taxes can lead to liens, which may indirectly affect credit scores and lead to other financial consequences.
What to Do If You Owe Back Taxes
If you owe back taxes, taking proactive steps to address the debt can prevent the situation from worsening and may reduce some of the financial strain. Here are six general steps to help you manage back taxes effectively.
1. Verify Your Tax Balance
Begin by confirming the amount you owe. You can do this through your IRS online account, which provides a detailed breakdown of taxes, penalties and interest.
2. File Any Unsubmitted Returns
If you have unfiled tax returns, submit them immediately, even if you cannot pay the full amount owed. Filing can reduce late-filing penalties and also gives the IRS a record of your outstanding balance, which may facilitate future resolution options.
3. Explore Payment Plans
The IRS offers flexible payment options to help you manage your debt. Short-term payment plans allow up to 180 days to pay in full, while long-term installment agreements extend payments over months or years. The long-term plan requires a setup fee, but both options make it easier to budget your payments and avoid more severe IRS actions.
4. Request Penalty Abatement
In some cases, taxpayers can apply for penalty relief. The IRS may reduce or waive penalties if you can demonstrate reasonable cause, such as a medical crisis or natural disaster, or if this was your first time incurring a tax penalty. This can lessen the total debt burden, especially if penalties have accrued over time.
5. Consider an Offer in Compromise
For those experiencing serious financial hardship, the IRS provides an option to settle the debt for less than the full amount owed through an offer in compromise (OIC). To be eligible, you must meet certain criteria, such as having filed all legally required tax returns, not being in an open bankruptcy proceeding and having made all required estimated tax payments for the current year.
If approved, an OIC can provide substantial relief, but it's generally granted in limited circumstances.
6. Seek Professional Help If Needed
If your tax situation is complex, a tax professional, such as a certified public accountant (CPA) or tax attorney, can help you navigate the process. They can negotiate with the IRS on your behalf, file necessary documents and ensure that you take advantage of all available relief options.
Bottom Line
Addressing back taxes promptly is essential to avoid escalating penalties, interest and potential legal action from the IRS. By filing any past-due tax returns and paying owed amounts, you can mitigate additional charges and regain control over your financial situation. The IRS offers options such as payment plans or offers in compromise to assist taxpayers in settling their debts.
Tips for Planning Taxes
- A financial advisor can help you optimize your portfolio for taxes. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset's tax return calculator can help you determine how your income, withholdings, deductions and credits will affect your next refund or balance due.
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