Owing the Internal Revenue Service (IRS) back taxes can be one of the most stressful things in life and can easily provoke the “fight, flight or freeze” response, and each response can have a dramatic outcome:

• “Flight” is reserved only for those who have knowingly committed tax evasion or fraud and face possible jail time. Even fleeing to a deserted island will only guarantee a lifetime of looking over your shoulder.
  
  
• “Fight” – certainly focusing on the problem at hand and formulating a plan – is the correct response that will achieve the best outcome when you owe back taxes.
  
  
• “Freeze”, surprisingly, is the response of many who find themselves on the wrong side of the IRS. Not acting, however, when you owe back taxes, is a recipe for disaster.

“A big wad of debt owed to the IRS can be a soul-crushing burden, but the worst thing you can do is to ignore the issue. It will not go away,” says CNBC.

No Scenario in Which IRS Will “Let it Go This Time”

Even if not acting has no immediate repercussions, taxpayers need to know that time is on the IRS’s side when it comes to debt collection.

“The IRS has 10 years to collect any taxes you owe, so getting behind with your taxes is not a problem that will go away anytime soon,” says experienced tax lawyer Steve Powell. “There is no scenario in which the IRS decides to “let it go this time”. Anyone who tells you otherwise should immediately be disqualified from giving tax advice!”

If you do owe back taxes, you are not alone, as the Community Legal Aid of Ohio estimates that more than 10 million Americans owe back taxes or almost 5 percent of the adult population. The IRS, in its most recent report, says that Americans owe over $120 billion in back taxes, penalties, and interest in 2022.

What are Back Taxes?

Dealing with taxes is an essential responsibility for individuals and businesses alike. However, circumstances may arise where taxpayers find themselves owing back taxes.

What are Back Taxes?

Back taxes refer to unpaid or overdue taxes that a taxpayer owes to IRS or other tax authorities.

These taxes can accumulate due to various factors, such as underpayment, failure to file tax returns or errors in reporting income or deductions. When back taxes are owed, it is essential to address the situation promptly to prevent further consequences.

“It makes no sense to keep waiting to resolve your back tax issues,” says Powell, whose firm works with those dealing with the IRS in the Austin, Houston, and San Antonio area. “You just need a plan, and most likely you need to work with someone who can quickly move you through the process.”

Situations Leading to Back Taxes

There are several situations that can lead individuals or businesses to owe back taxes, including:

• Underreported Income: Failure to accurately report all income earned, such as self-employment income, rental income, or investment gains, can result in back taxes owed.
  
  
• Unpaid Estimated Taxes: For self-employed individuals or those with income not subject to withholding, failure to make sufficient estimated tax payments throughout the year can lead to back taxes.
  
  
• Failure to File Tax Returns: Neglecting to file tax returns, whether intentionally or unintentionally, can result in accumulating back taxes.
  
  
• Errors or Mistakes: Mistakes in calculating deductions, credits, or other tax obligations can lead to underpayment and the accrual of back taxes.
  
  
• IRS Audit Adjustments: If the IRS conducts an audit and identifies discrepancies or errors in past returns, it may result in additional tax liabilities and the need to pay back taxes.

“What happens if you don’t pay taxes? As you can imagine, nothing good happens,” says U.S. News & World Report. “You may have a problem of not being able to pay your taxes, but if you don’t try to solve it, a bad problem will just get worse.”

IRS Actions for Back Taxes

When a taxpayer owes back taxes, the IRS may take various actions to collect the outstanding debt. These actions can include:

• Notices and Demand Letters: The IRS will typically send notices and demand letters to inform taxpayers of their outstanding tax liabilities, providing instructions on how to resolve the issue.
  
  
• Penalties and Interest: The IRS may impose penalties and interest on unpaid taxes, which can significantly increase the overall amount owed.
  
  
• Tax Liens: The IRS may file a tax lien, which is a legal claim against the taxpayer's property as collateral for the unpaid taxes. This can affect the taxpayer's creditworthiness and ability to sell or transfer assets.
  
  
• Wage Garnishment: In severe cases, the IRS may garnish a portion of the taxpayer's wages to satisfy the back taxes owed.
  
  
• Bank Levies: The IRS can issue a bank levy, allowing them to seize funds from the taxpayer's bank accounts to settle the outstanding tax debt.

Remember the “freeze” response, here is how it can cost you a lot of financial heartache: IRS penalties and interest for late payments and for late filing can really pile up.

 “If you owe tax and don't file on time, there's also a penalty for not filing on time. The failure-to-file penalty is usually five percent of the tax owed for each month, or part of a month that your return is late, up to a maximum of 25 percent,” explains the IRS. “If your return is over 60 days late, there's also a minimum penalty for late filing; it's the lesser of $450 (for tax returns required to be filed in 2023) or 100 percent of the tax owed.”

Generally, interest accrues on any unpaid tax from the due date of the return until the date of payment in full. The interest rate is determined quarterly and is the federal short-term rate plus 3 percent.

Actions for Taxpayers with Back Taxes

Powell breaks down the actions for taxpayers when faced with back taxes of formulating a plan, filing the corrected or missing tax returns, and then paying the government funds owed.

“The first step in the plan is to gather the correct forms for all the tax years in question,” says Powell, who points out that gathering relevant documents is crucial. “There is simply no way to avoid filing a return for each of the tax years you missed, and before you can file a return you must have the proper records before you.”

If your tax situation is complicated by events such as owning a business, going through a divorce, or having earned or lost a significant amount of money through investments, then consulting a tax professional may be your best course of action.

Taxpayers who owe back taxes have several options to address and resolve their tax liabilities:

• Payment Plans: The IRS offers various payment plans, such as installment agreements, where taxpayers can make monthly payments to settle the debt over time.
  
  
• Offer in Compromise: In certain circumstances, taxpayers may qualify for an offer in compromise, allowing them to settle their tax debt for less than the total amount owed.
• Penalty Abatement: Requesting penalty abatement from the IRS can reduce or eliminate the penalties associated with back taxes, though the underlying tax liability still needs to be paid.
• Seek Professional Assistance: Consulting with a tax professional, such as a tax attorney or enrolled agent, can provide guidance on the best course of action based on the taxpayer's specific situation.
• Amending Past Returns: If errors or omissions were made in previous tax returns, filing an amended return can rectify the situation and potentially reduce the amount of back taxes owed.

Owing back taxes can be a challenging and stressful situation for taxpayers. Understanding the causes, consequences, and available remedies is crucial for effectively resolving back tax liabilities.

It is important to address the issue promptly, communicate with the IRS, and explore options such as payment plans or offers in compromise to achieve a resolution.

Seeking professional assistance can provide valuable guidance and ensure compliance with tax laws.

By taking proactive steps, taxpayers can work towards resolving their back taxes and regaining financial stability.

“The most important thing to remember is this: you can resolve your situation with back taxes. You just need a plan, and most likely you need to work with someone who can professionally guide you through the process and fight the government on your behalf,” concludes Powell.