Steps to Filing Back Taxes
Most individuals are required to file their individual income tax returns or pay all of their back taxes by April 15th of each year. If you have failed to file your return, you will have additional interest and penalties to pay. If you owe back taxes and need help, an Enrolled Agent, Certified Public Accountant (CPA) or Tax Attorney can help. To pay all of your back taxes you can do the following:
- Gather all of your documents together. If you do not have copies of previous tax returns you can request copies from the IRS for free.
- Hire a Tax professional. If you lack the expertise or do not know where to start, find a professional that you are comfortable with who has the experience to help you handle complicated tax issues. Look for an Enrolled Agent, Certified Public Accountant or Tax Attorney who has experience negotiating a variety of tax settlement options with the Internal Revenue Service.
- Know the statute of limitations for your refunds, debt collection and IRS audits. The IRS has very aggressive debt collection tactics. The Internal Revenue Service can use wage garnishments, tax liens, bank account levies and other tactics to settle back tax debt. Many taxpayers will be eligible for a tax refund. To avoid owing back taxes it is important to work with a who understands what your estimated IRS tax liability will be each year.
- Send your back taxes to the IRS. If you are unable to pay your back taxes in one lump sum payment to the IRS, you may have to investigate other tax settlement options to avoid an IRS levy, tax lien, repossession, or wage garnishment. The IRS has several tax settlement options such as installment plans or offer in compromise plans which may allow you to pay your back taxes over an extended period of time. Late tax returns must be filed on paper and sent to the correct Internal Revenue Service Center. Late payments should be mailed by certified mail. Keep all records and proof that the tax return was received. Another option is to take the tax return in person to your local IRS office. The IRS representative can time stamp the return which will provide you with evidence of when the IRS received your back tax payment.
- Review your future tax plans. If you are self-employed or if you owe more back taxes each year than you can afford to pay, an Enrolled Agent, CPA or Tax Lawyer can work with you to review your tax situation and help you develop a tax plan.
Understanding Late Filing Fees
The IRS will review your tax return for accuracy and if the taxes paid are insufficient, they will send you a tax bill. If you failure to pay the full tax amount, the IRS will charge interest and penalties on the taxes owed from the due date of the tax return until you have paid the remaining balance.
Calculating interest and penalties on taxes can be complicated and it is important to contact a tax professional if you have questions, but in general, the IRS calculates the interest rate every three months using the federal short term rate plus three percent. The interest rate is compounded daily.
In addition to interest charges, the IRS will also charge penalties for back taxes. There are two types of penalties charged- failure to file penalties and failure to pay penalties. The failure to file penalty is calculated from the due date of the tax obligation until the date they receive your tax payment. The IRS charges 5% every month that the payment is late, up to 25% maximum. If you are more than five months late, you can estimate the failure to pay penalty by multiplying your balance by 25%.
The failure to pay penalty is determined by the amount of IRS taxes which are due. The penalty is .05% for every month which you fail to pay the full tax debt. Unfortunately, there is not a maximum amount the IRS will charge for the failure to pay penalty. The IRS will calculate this penalty from the April 15th due date.
To avoid all taxes and interest it is important to file all IRS tax returns for back taxes before the due date. It may be possible to borrow the money at a lower interest rate and pay back taxes than to end up paying the amount of money the IRS will charge in interest and late payment penalties. If you are unable to meet your IRS tax debt obligations, you can avoid most charges by filing an extension.
The IRS may sometimes wave penalty charges for late filing or payment if you can give them a reasonable explanation. Interest charges usually continue to accrue until you have paid the full amount of back taxes, penalties and interest. The IRS will assess your exception to pay your back taxes and determine if penalties should be waved after you have paid all of your back taxes in full. Exceptions the IRS may accept include: persons serving in the armed forces or citizens or residents alien working abroad.
Taxes Calculated Incorrectly
If your back taxes have been calculated incorrectly or the IRS has sent you a tax bill that has the incorrect IRS tax amount, you need to contact the Internal Revenue Service prior to the IRS tax debt payment deadline. If you believe your tax debt is incorrect, an Enrolled Agent, CPA or Tax Attorney can review all of your financial information to help you determine the error. Or you can send photocopies of your tax records to the IRS and they will be able to review the information to determine if there is an error. There is a phone number listed on your IRS tax bill that you may call for assistance. The Internal Revenue Service should be willing to work with you to correct the tax bill if there has been an error.
Statute of Limitations
The IRS can not collect back taxes forever. Fortunately, federal tax laws have established deadlines for the IRS to bring certain actions against you including tax audits and all IRS debt collection actions. In most cases there is a three year statute of limitations for the IRS to audit your tax return and a ten year statute of limitations for them to collect all IRS tax debt including penalties and interest. The laws may vary by state and it is important to contact someone with extensive knowledge for answers to your questions about limitations on tax collection. The statute of limitations may not apply if you file false or fraudulent tax returns in an attempt to evade paying IRS tax debt obligations.
There is also a statute of limitations for collecting a tax refund for overpayments. Currently the statute of limitations to collect an overpayment is three years from the date the tax return was filed and two years from the date the tax was paid to the Internal Revenue Service, or whichever period is the latest. If you have failed to file the tax return, you must make the claim within two years from the date that the IRS tax debt was paid to the Internal Revenue Service.
Meet with an Enrolled Agent, CPA or Tax Attorney if you have questions about the start date for the statute of limitations.