Back taxes are taxes that were not paid at the time they were due and remain outstanding.

You can acquire back taxes for any number of reasons, such as: 

  • Filing a return and failing to pay the amount owed
  • Failing to report all earned income during the tax year
  • Neglecting to file a tax return altogether

These actions can be intentional — like deliberately underreporting income — or unintentional, such as not designating enough money to be withheld throughout the year. 

Consequences of Unpaid Back Taxes

If unpaid, back taxes can accumulate significant interest and penalties over time. 

The subsequent consequences are typically less severe if you file on-time returns and still owe back taxes, versus failing to file a tax return in its entirety.

Here is what you would owe in those two scenarios:

  • Failure to file: Owed interest plus a 5% penalty for each month the return is late, up to a maximum of 25% of the overall tax bill. The IRS can even submit a substitute return on your behalf, which may not include any credits or deductions that would offset the amount you owe.
  • Failure to pay: Owed interest, plus a 0.5% monthly late fee.

Depending on the circumstances, the IRS may take extreme measures to deal with back taxes, such as legal action, tax liens, wage garnishment, and more. For example, if the owed tax remains unpaid, the IRS has the power to seize property and assets — including bank accounts, investment accounts, automobiles, and homes — and place federal tax liens informing creditors of their legal right to the taxpayer’s assets and property until the money is collected. If the situation further escalates and a tax levy is put in place, the government is permitted to seize and sell the property to pay back the debt.  

How to Resolve Back Taxes 

While owing back taxes can feel overwhelming, it’s best to be proactive when it comes to dealing with the IRS. Here are some approaches and strategies that can help to resolve past-due taxes: 

  1. Negotiate a payment plan with the IRS

In some cases, you can set up IRS payment plans, also known as installment agreements. The terms and conditions of the agreement will depend on the details of the situation, including how much you owe and how long it will take you to pay back the balance in full. 

  1. Request a short-term extension 

You can also request an extension to pay the full tax balance. There is no fee to request an extension, but the IRS will charge interest and a late payment penalty of 0.5% per month on the unpaid balance. 

  1. Apply for a hardship extension 

The IRS offers various options for taxpayers in hardship situations. This includes the Offer in Compromise and Currently Not Collectible status. To qualify, you will have to prove that paying the tax would cause significant financial hardship, according to IRS standards. 

  1. Partner with a qualified tax professional 

Your best option is to work with an experienced tax professional to negotiate with the IRS on your behalf. Navigating the ins and outs of a bureaucratic organization can be quite confusing and messy. Taxpayers will often get into situations that are nearly impossible to get out of and wind up paying more than necessary. A seasoned tax expert can guide you through the process and provide a clear path to financial freedom.