Updated
Apr 05, 2023 Falling behind on your taxes can have serious consequences. You can get hit with penalties, the IRS can take a portion of your wages, or you could even lose your assets (like your home or car).
For these reasons, it’s crucial to settle back taxes as quickly as possible. Do you need back tax help? This guide can help.
On this page:
- Understanding back taxes
- How to get rid of your back taxes
- How working with a tax relief company can help
- How to file back taxes
- Consequences of unpaid back taxes
Understanding back taxes
When you fail to pay the total amount owed to the IRS come tax day, you owe the agency what are called “back taxes.”
Unfortunately, the longer you wait to settle back taxes, the more you’ll have to pay. Back taxes come with monetary penalties, which start at 5% of your total overdue balance. You’ll also be charged interest on that balance annually.
>> Read More: Here are your options if you owe $10,000 or more in taxes
How to get rid of your back taxes
If you currently owe back taxes, there are numerous ways you can settle your debt and avoid further consequences. Here are the options you’ll want to consider:
Pay the full balance
The easiest way to resolve the issue is to pay the IRS your full, overdue balance. Keep in mind that your balance is likely higher than the tax payments you skipped. Once penalties and interest are added in, you may owe significantly more than you think.
If you’re considering this route for settling your debt, create an account at IRS.gov or call the IRS directly to get your updated overdue balance.
Request an extension
If your financial difficulties are only temporary, you might consider filing for an extension. An extension lets you delay filing your tax return for up to six months — or until October 15.
Though you’ll still pay a late penalty and interest on the balance, you won’t see any of the other consequences the come with back taxes (like wage garnishment, etc.) To request an extension, you’ll need IRS Form 4868.
>> Read More: How to stop IRS wage garnishment
Pay back taxes with an installment agreement/monthly payment plan
Another option is a payment plan, which allows you to spread your overdue balance out over time. As with extensions, your balance will still accrue interest and penalties. The main benefit is that you can gradually pay off the debt rather than all at once, making it more manageable.
There are both short-term and long-term payment plans available. Here’s how those differ:
| Short-term | Long-term | |
| Repayment term | 120 days or less | Up to 6 years |
| Setup fee | $0 | $31 to $149 |
| Maximum tax debt | $100,000 or less | $50,000 or less |
Source: https://www.irs.gov/payments/payment-plans-installment-agreements
To learn more about these plans, check out our guide on how to set up a payment plan with the IRS. To apply online for either of these payment plans, use the IRS’ online application tool.
Make an offer in compromise
An Offer in Compromise lets you settle your tax debt for less than what’s due. According to the IRS, these are options if you can’t pay your full tax bill, or doing so would create financial hardship for your household.
To see if you might be eligible to submit an Offer in Compromise, use the IRS’s pre-qualifying tool. If you qualify, you’ll need to follow these instructions and use Form 433-A and Form 656 to apply. You will also need to pay a $205 application fee.
File for currently not collectible status
If paying your taxes would leave you with no cash to cover essentials, you might qualify for Currently Not Collectible (CNC) status with the IRS. With a CNC designation, the IRS will push pause on your overdue taxes, and your balance won’t be sent to collections or result in wage garnishment.
To apply for CNC status, you have to contact the IRS directly. You will need to have your returns filed for the tax year (even if you can’t pay the taxes owed on them) and will need documentation of your income, debts, living expenses, and more on hand. You’ll use this to fill out Form 433.
Pay back taxes with a loan, credit card, or another form of financing
Your final option is to pay off your back taxes with a loan — a personal loan, a 401k loan, a home equity loan, etc. You can also use credit cards and lines of credit.
The advantage of these is that you’re able to settle your debt in full, without any harsh consequences like liens or asset seizure. On the downside, though, you’re just replacing one debt with another — and often, it may come with a higher interest rate, too.
How working with a tax relief company can help
If the above options seem overwhelming or confusing, some tax professionals can help. Tax relief companies specialize in addressing back taxes and other IRS issues. They can work to resolve your problems, too.
Most require a fee upfront to investigate your current tax problems. Once they’ve assessed the situation, they’ll propose a plan of attack, which might include making an offer in compromise, setting up a payment plan, or one of the strategies listed above. These services will also come with a fee, though it typically varies based on the complexity of the issue.
If you’re considering getting professional tax relief help, be wary of scams and be sure to shop around, as fees and expertise can vary wildly. Use our guide to the best tax relief companies to get started. Most of these companies employ several types of tax professionals, including tax attorneys.
How to file back taxes
If you’re ready to settle your back taxes, your first step is to file the returns for those overdue years (if you haven’t already). To do this, you’ll need to gather all your W-2s and 1099s for the previous years, as well as receipts if you’ll be making deductions.
If you can’t find some of your earning statements, you can use the IRS 4506-T form, which will show you a record of W-2s and 1099s that were filed. Keep in mind that it might take over a month to receive these records.
Next, download the appropriate tax forms from the IRS website, as you’ll need the form specific to each year you’re filing. Once you have these in hand, you can file your taxes and submit them, along with your full or partial payment, to the IRS.
A quick note: You can file back tax returns for up to six years prior.
Consequences of unpaid back taxes
Not paying your taxes comes with severe consequences.
First, there’s a penalty assessed for not filing your returns on time. This fee ranges from 5% to 25% of your unpaid balance. There’s also a failure to pay the penalty that is charged monthly. On top of this, the overdue balance will start to gain interest, which ultimately means paying more in the long run.
The IRS can also:
- Garnish your wages. With wage garnishment, the IRS withholds a part of your wages to put toward your tax balance.
- Issue a tax lien against you. A federal tax lien is essentially the government making a legal claim to things like your bank accounts, house, car, or even business. Liens show up on your credit report and can damage your score. They can also stop you from selling your home or refinancing a loan.
- Seize your assets. The IRS can also take money straight from your bank account or out of your business. In some cases, they can even seize property like a house or boat.
Back taxes can hurt you down the road, too. If you pay your taxes on time in a future year and are owed a tax refund, the IRS can withhold this refund and put it towards your overdue back taxes.
The bottom line
Back taxes are serious — and if you owe them, you’ll want to start addressing them ASAP. If you’re unsure where to start, a CPA or tax relief company may be able to help.