Back Taxes Featured Article

Failure to File Penalty

One penalty is called the “failure to file penalty”. In spite of what the name implies, this does not always occur for those who choose not to file (although this is the common case). Those who would have received refunds as a result of filing their tax return receive no penalty other than the lost refund. For the most part, however, tax returns recognize money that is owed to the government (back taxes) rather than the other way around. So if an individual fails to file their return and they end up owing money to the government, penalties on top of the back taxes are assessed. This may sound unreasonable at first, but such a policy encourages individuals to file their tax returns on their own, or at least consider their tax expenses, so that the government does not waste too much of its own time determining the amount owed for each individual. The more proper tax returns there are, the less likely it is for back taxes to exist.

This penalty can be very costly, especially in situations where a large amount of back taxes are owed. Furthermore, for every month that the tax return has not been submitted, a penalty fee is incurred. This penalty increases each month until it reaches its maximum. Waiting too long to file a late tax return could have devastating effects on the amount the taxpayer must deduct from their paycheck to give to the government due to back taxes and other penalties.

The penalty is normally calculated by taking five percent of back taxes owed for each month they are unpaid. For example, submitting a return two months late would result in a penalty equal to ten percent of the back taxes. The maximum penalty allowed on the national level for the failure to file a tax return is twenty-five percent of the back taxes. Therefore, if an individual submits his or her tax return five months after it was originally due, they must pay the maximum penalty. This amounts to the original back taxes plus an additional twenty-five percent of the unpaid tax money.

Failure to Pay Penalty

There is also a “failure to pay penalty”. This is different from the filing penalties, which merely deal with timing and promptness. The “failure to pay penalty”, on the other hand, deals with the question of whether or not the actual back taxes have been paid. Paying for back taxes immediately prevents any of these penalties from being assessed. For every month that back taxes are unpaid, however, there is a penalty fee equal to half of a percent of the amount owed. For example, if an individual waits eight months to pay their back taxes, they also owe an additional four percent of the amount due. This penalty increases each month by half of a percent until the back taxes have been taken care of. Unfortunately, there are no maximums for this type of penalty. The penalty keeps building up along with the back taxes until the individual is overwhelmed in debt.

Interest

In addition to all of these penalties and fees, there is one other important consideration that has not yet been discussed: the amount of interest that has accrued on their back taxes. During the time that the back taxes have not been paid, the IRS charges interest since back taxes essentially operate as a loan. An individual is “borrowing” by taking money that should have been reserved for paying taxes and investing it elsewhere. Naturally, the IRS feels obligated to charge an additional fee for interest on back taxes in the same way that banks and other agencies do. These rates of interest for back taxes change approximately four times a year and end up typically being close to four percent.

With lawyers, you may end up paying less for penalties derived from back taxes. Back taxes are already annoying as it is: why intensify the situation with further penalties and fees, especially when using an alternative form of payment (such as a credit card) would have helped the situation? Interest rates can be higher than they appear after considering each penalty for “taking out the loan” for an additional period of time. Consider this scenario to illustrate the point. An individual who is six months late for filing their tax return is already responsible for all of these payments: the back taxes, failure to file penalty of twenty-five percent of back taxes, a failure to pay penalty of three percent of back taxes, and interest of two percent of back taxes (for half of the year). The stated interest of the back taxes is only two percent. The “true interest” of neglected back taxes, however, is essentially all penalties put together (in this case, thirty percent), as this is the expense incurred for “borrowing” the money owed.

Alternative measures can be taken to counter the payment of “interest” on back taxes. For example, even if a credit card does not offer the most competitive interest rate, it would be much better to owe an awful twenty-two percent on the credit card rather than thirty percent of back taxes. Therefore, anticipation is an absolutely necessary tool. If one knows they need extra time to pay their back taxes, they should consider options that result in less financial obligation so that they can have more money for themselves.

If an individual owes back taxes and believes they may be unable to pay, they must immediately seek help to ensure the eventual payment of the financial obligation. The most professional and knowledgeable assistance comes from tax lawyers, who can help with strategies regarding the payment of back taxes. They can realistically help an individual anticipate when they will be ready to pay back taxes and subsequently recommend the best course of action.

Normally, the IRS continues to charge fees until the balance is paid. Like back taxes, such fees can build up fast and must be prevented. It may be somewhat comforting to know that it is rare to be placed behind bars as a result of not paying back taxes. However, in cases of extreme negligence or evasion, some individuals may have serious charges placed against them if they go a few years without paying their back taxes. This mainly deals with those towards the top of the income bracket who are responsible for knowing how to manage their money and how to pay their taxes. Regardless of social background, one must still take care to pay taxes properly to prevent any kind of consequence. Although it will not normally get a taxpayer locked away in prison, the ignorance of taxes is a slippery slope that results in burdensome financial obligations.

Tax Liens

After an individual consistently neglects back taxes and their associated penalties, the IRS may choose to take further action. They may choose to perform a tax lien, which basically gives the government the right to have an individual’s property as a result of them being unable to pay taxes. This only occurs after the IRS has already contacted the individual to inform them of the balance owed as well as the due date. Once the IRS determines the individual has ignored their back taxes for long enough, they issue the tax lien as a consequence. An individual gets rid of a tax lien by paying the original balance due. On top of having property controlled by the government, an individual who has been given a tax lien will find it more difficult to maintain a high credit.

Tax Levies

Sometimes, however, the IRS determines that it must take further negative action to recover the money lost from back taxes. A tax lien can only give the government title to the property while the original owner still benefits from its use. If a taxpayer continues to neglect back taxes, the IRS may choose to levy the property. This means that the government will come in and take away the property of the taxpayer as a means of payment. Since this gives the IRS an immense amount of power, it is only reserved for the most severe cases of back taxes. Therefore, a thirty-day final notice must be given before the levy is able to take place.

This is essentially the absolute worst thing that could happen to a taxpayer. The IRS is given complete control over what they want to take and what they want to control. They could choose to take a car or a home entertainment system. After taking the property, they determine its value and apply it towards the back taxes. Furthermore, the IRS can take items beyond the property located in the taxpayer’s residence. It can be granted access to bank accounts and company paychecks. It can even take a loan out against an individual’s life insurance policy to make sure the back taxes are paid. Only after the payment of back taxes will the IRS release the levy. If they are lucky, the taxpayer can then recover most of the items that had previously been taken by the IRS.

These consequences all have a large impact on a taxpayer. They should not be taken lightly. Back taxes must be paid for immediately to avoid these penalties. In the most extreme cases, the IRS could come in and take most of a taxpayer’s property. Whatever the case, whenever the IRS takes action on back taxes, it is not usually very pleasant.

Paying off Back Taxes

There is only one easy way to make back taxes go away, and it’s pretty straight forward: be responsible with calculating taxes and take care of all discrepancies immediately before penalties are assessed. It sounds like the obvious solution, but many taxpayers allow their back taxes to build up because they place their priorities elsewhere. This only ends in further misery and financial struggle. To avoid back taxes, it is imperative that taxpayers properly calculate the amount they owe without making any mistakes with their deductions. Tax returns should be turned in on time so that no further penalties come from an audit that reveals mistakes. Once notified of back taxes, an individual must do everything they can to pay it immediately. Neglecting to pay back taxes, which is normally a relatively small amount, can result in a plentitude of financial stress and turmoil. Back taxes must therefore be near the top of an individual’s priority list when it comes to paying for financial obligations.

Installment Plans

One possible method that many individuals use to pay off back taxes involves requesting a system of installment payments. As the title implies, taxpayers who do not want to pay back taxes all at once may instead do it over a certain period of time.

Naturally, this means an individual will have to worry about back taxes for longer than usual, but it is a valid option for taxpayers with limited amounts of cash. It is better to take this action than it is to completely ignore back taxes. On top of that, payment plans can be tailored to fit individual needs. Taxpayers who have a low budget can secure some of their funds by choosing to participate in an installment plan. As long as taxes are paid according to this plan, the IRS will be happy and there will be no back taxes assessed.

Reducing Back Taxes

The IRS is notorious for intensely collecting money from taxpayers and penalizing those who do not pay. It is easy to assume that they do not allow any negotiation and simply demand each payment. However, in certain circumstances, the IRS may choose to, or be obligated to, somehow reduce back taxes that are owed. If an individual feels as though they must reduce the amount of their back taxes, consultation with a tax lawyer would provide quick and easy potential solutions. When this is not possible, however, there are a few options that can be explored to reduce back taxes.

Offer in Compromise

As discussed above, the IRS may be willing to compromise. Believe it or not, the IRS is sympathetic to the unexpected turns that life can take. If an individual presents a legitimate reason for being unable to pay their back taxes, the IRS will often begin a negotiation with the taxpayer to see how much they can pay. Sometimes, the remaining amount is forgiven. If there has been some sort of emergency or obligation that requires financial attention, the IRS is willing to compromise as long as the request is reasonable. The IRS does not give much attention to petty or unnecessary requests merely due to the fact that the individual does not want to pay. Instead, each taxpayer must take responsibility to pay their back taxes before penalties are assessed.

Once again, should an individual choose to pursue such a route, it is very beneficial to contact a tax lawyer with expertise in negotiation. Such tax lawyers have a general feel for what the IRS will listen to. The taxpayer (or, as the case may be, “no-tax-payer”) must first decide for himself or herself whether or not their excuse is legitimate enough to garner sympathy from the somewhat strict IRS. If the excuse is reasonable, the individual must determine how to present their excuse in a manner that induces the IRS to reduce the payment. Tax lawyers know exactly how to present situations so that the IRS feels obligated to reduce back taxes. If the taxpayer is successful at compromising with the IRS, then a portion of their back taxes will be “forgiven”. They are still responsible for future tax payments that are incurred.

Chapter 7 Bankruptcy

Another factor that can cause the IRS to reduce the amount of back taxes owed concerns Chapter 7 Bankruptcy. This kind of bankruptcy is generally reserved for individuals who are so overwhelmed in debt that they are willing to give up most of their assets in exchange for a “clean slate”. It is not to be confused with the similarly popular Chapter 13 Bankruptcy, which extends, rather than forgives, the amount of time to pay a loan. Under Chapter 7 Bankruptcy, many kinds of small debts, such as credit card debt and back taxes, are forgiven. Unfortunately, only essential assets, such as real estate and necessary tools or equipment, are granted to the individual who has declared bankruptcy. Although it is not the preferred way to remove back taxes, Chapter 7 Bankruptcy is definitely an effective tool when worst comes to worst. And the best part? As soon as the individual files, collection agencies are not allowed to harass the taxpayer anymore, which means the number of calls a bankrupt individual must ignore sharply decreases. To choose this option, however, an individual must be willing to give up some very precious assets. Once the court has determined the requirements, the individual will not have to worry about the back taxes in question ever again (unless, of course, the individual incurs back taxes after declaring bankruptcy). If they are willing to endure the cost, a taxpayer should take this route to take care of their outstanding back taxes.

Due to the nature of declaring Chapter 7 Bankruptcy, or any kind of bankruptcy for that matter, it is important for taxpayers to hire a tax lawyer so that they can keep as much of their property as possible while simultaneously getting rid of debt caused by back taxes. It may initially appear to be counter-productive, but a lawyer can secure the elimination of back taxes so that they will never have to be worried about again. A lawyer may also be able to have a better negotiation in which the taxpayer walks out with more of their property intact.

Waiting 10 Years

Believe it or not, an alternative way to get rid of back taxes is to wait ten years. The law actually mandates that back taxes disappear after ten years. Of course, there are negative penalties, such as tax levies and other side effects, that accompany this option. Remember: the IRS can still collect on an individual’s property based on taxes owed. Therefore, waiting ten years to get rid of back taxes is rarely considered the best choice. However, in some circumstances, back taxes are best taken care of in this manner. For example, if an individual is considering bankruptcy but has back taxes that are almost ten years old, they may be able to avoid the disadvantages of bankruptcy by waiting for the back taxes to be cleared. However, such circumstances are uncommon and it is best to consider other options before waiting ten years to get rid of back taxes. Consultation with a tax lawyer would definitely give more insight into whether or not waiting ten years is the best option.

For those who are already planning to eliminate back taxes by waiting ten years, a word of caution: there are some exceptions to the rule. An example of this occurs when a taxpayer has submitted a tax return past the due date. Whenever this happens, the ten year period may be renewed under certain circumstances. Therefore, when consulting with a lawyer in such circumstances, taxpayers must make sure the lawyer is fully qualified to deal with such exceptions to back taxes. A taxpayer must always be confident that their particular situation does not qualify as an exception. If a taxpayer expects their back taxes to go away after ten years, when in reality they do not, they could face serious financial problems.