If you owe back taxes to the IRS, you are not alone. Taxpayers fall behind on their obligations to Uncle Sam for many reasons, such as a job loss, illness or unmanageable expenses. The chances of the IRS eventually sending you a tax bill and taking aggressive collection action are very high.
To minimize the financial damage of back tax liability, it’s important to formulate a plan of action and speak with an attorney that specializes in tax law and resolution.
Step One: Know What You Owe
Determine what you owe. It’s difficult to formulate a plan to address your back taxes when you don’t know the size of the debt. If you have already filed your return, then you’ll simply have to figure the taxes, fees and penalties owed.
However, many people who owe back taxes have not filed their returns. In that case, the taxpayer needs to do a careful job of calculating what he or she owes, including taxes and fees. When computing the amount owed is difficult, taxpayers are well served by visiting a tax pro, who will ensure they owe the lowest amount legally possible.
Step Two: File Your Return
File your taxes, even if you can’t afford to pay. If you owe money this year but can’t afford the payment, file your return with whatever amount you can afford to pay. You will still be hit with the late penalty, which is 5% of tax owed per month up to 25%; however, by filing, you avoid the failure to file penalty, which is an additional 5% per month up to 25% of the tax liability.
Taxpayers who have back taxes and overdue tax returns should file as soon as possible, regardless of ability to pay. If returns remain unfiled, the IRS can file a substitute return, which consists of only very basic deductions and works in favor of the IRS. A substitute return usually substantially overstates tax liability, allowing the IRS to bill you for more tax than you owe and calculate penalties and interest on that inflated number.
If the IRS has filed a substitute return, it’s important to file an amended return that reduces your tax to the appropriate level. If you are unsure how much the IRS has overstated your tax liability on a substitute return, visit a tax professional who can file an amended return on your behalf.
Step Three: The Fresh Start Program
Determine if you are eligible for the Fresh Start program, which can make the repayment of back taxes far easier and, in some cases, reduce some of the tax liability. The IRS started the program in 2011, in recognition of the fact that many Americans face tough economic times and become delinquent because of hardship.
If you cannot repay the entire balance now, apply for an installment plan that allows you to gradually eliminate your tax liability.
Step Four: Freedom
Pay off your back taxes and get the IRS off your case!
Tips for Avoiding Owing Back Taxes
No one wants to owe back taxes. The penalties are stiff, the IRS can seize property and it’s difficult to manage paying back taxes and current taxes at the same time. The easiest way to deal with back taxes is to never have them in the first place. To avoid them, try the following:
Estimate Your Upcoming Taxes
Knowing what you’ll owe on Tax Day long before the W2s come out makes budgeting for tax season easy. If you make money from an employer, ensure that your withholding level does not leave you owing more than you can afford on Tax Day. It’s better to get some money back than owe a large sum.
Self-employed people may be subject to quarterly estimated tax payments. Though this can be a bit of a chore, it helps avoid getting into tax debt because taxes must be regularly estimated.
Engage in Tax Planning
One way to avoid back taxes is to owe less tax in the first place. Maximizing deductions and credits takes planning. For example, contributions to an IRA or other tax advantaged account requires setting up an annual budget that allows you to maximize the tax benefits without leaving you with too little money to manage taxes and other expenses.
Avoid Excessive Indebtedness
Excessive consumer debt, including mortgages, car loans and credit cards can leave you without enough money to cover your bills and pay your taxes. If the situation continues to escalate, you may eventually have to add the IRS to your list of creditors. By estimating upcoming tax and keeping debt payments at an affordable level, you can keep in good standing with Uncle Sam.
Back taxes are often a slow growing problem that expands out of control. Taxpayers can save time and money by confronting a tax problem head on and speaking with a tax specialist to take immediate action to resolve your tax problem.
If you are experiencing serious tax debt, The Law Offices of Peter C. Rageas can help. Our Michigan Tax Law Firm has been helping clients throughout the Detroit area and beyond for over 20 years! IRS debts require immediate action and most importantly, you should protect yourself against potential financial penalties. Contact us today and let’s begin rebuilding your financial future!