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No one likes to pay taxes, but it is our responsibility as American citizens to know and abide by all established tax laws, regardless of whether they are state, local, or federal. If this process is completed properly, one can avoid the burden of having back taxes. Back taxes result from the ignorance, whether intentional or unintentional, of taxpaying obligation. In some cases of back taxes, such as tax evasion, such ignorance is intentional. In other cases, such as those that result from minor errors on a tax return, back taxes result from an unintentional discrepancy between a taxpayer and the government. Sometimes, the taxpayer will notice that they owe back taxes when reviewing their tax return or when preparing an amendment to a previous year’s tax return. Sometimes, the IRS will determine the amount of back taxes owed based on a random audit. Whichever the case, back taxes must be taken care of immediately in order to prevent further penalties such as interest and tax liens. Tax lawyers are especially helpful in determining the best course of action when it comes to back taxes. They can even help with the reduction of back taxes. In certain circumstances, tax lawyers can even make it possible to get rid of back taxes without paying a dime.
Taxpaying responsibility, although often complicated, can be summarized with a few sentences. If a taxpayer follows these basic rules, they should not have to worry about back taxes. To avoid back taxes, as well as the penalties that come with them, one must generally:
- Fill out tax returns accurately (know your tax laws).
- Pay taxes on time (and if not, then pay back taxes as soon as possible).
- Take care of any discrepancies, whether positive or negative, immediately.
- It is important to file returns because it helps determine whether too much or too little has been paid. The respective party must be compensated, which may result in back taxes for the taxpayer.
- If a taxpayer discovers they have a negative balance of taxes owed (i.e., taxes already paid are greater than taxes owed), then they qualify for a tax refund.
- If there is a positive balance of taxes owed (i.e., taxes owed are greater than taxes already paid), and this balance is not taken care of immediately, the taxpayer will have back taxes.
Other processes such as IRS audits can reveal that there were more taxes than originally estimated. This also results in back taxes. Once discovered, back taxes are expected by the IRS to be paid immediately.
SPECIFIC CAUSES OF BACK TAXES
Failure to file a tax return
There are many ways to incur back taxes. Failure to file a tax return is one of many causes of back taxes. Even though tax returns are not technically required to be filed, most individuals choose to do so in order to double check previous tax payments. Therefore, filing a tax return often causes an individual to correct mistakes made from previous tax payments. If a taxpayer does not file their return and later discovers the error, then they owe the IRS back taxes and must pay these back taxes immediately or risk legal action. The worst possible scenario occurs when an individual neither pays their taxes nor files a return. Major instances of this scenario result in an extremely serious problem (especially when it is a reflection of generally fraudulent behavior). When an individual blatantly stops paying their taxes, they have a different problem entirely. Minor instances of this scenario, however, generally result in back taxes amounting to the payment that is owed to the IRS. As long as these back taxes are dealt with promptly, they are not problematic. If an individual waits too long, however, they will receive many phone calls and notices in the mail that demand accountability for the back taxes. Another scenario that can result in back taxes occurs when an individual does not file the return because they do not think it is necessary. If it turns out that it was indeed necessary to file the return, they will be penalized in addition to owing the back taxes. Individuals who have their taxes automatically deducted from their paycheck may believe that a tax return is pointless. This is especially true for taxpayers who believe they do not qualify for any deductions. Unfortunately, by ignoring the tax return, the individual may be missing out on potential tax refunds. Or, even more unfortunately, the individual may be building up back taxes without knowing it. Furthermore, on top of the back taxes owed, the taxpayer is also responsible for paying various fees for turning in a late tax return.
An audit by the IRS may also lead to back taxes. An audit occurs when a professional representative from the IRS reviews whether an individual has fulfilled their taxpaying obligations. This occurs in approximately 1% of submitted tax returns. In many cases, the IRS may assess back taxes that are owed as a result of discrepancies found in an individual’s tax return. In other words, an individual may have underestimated the amount of taxes that they owed. Upon discovering the back taxes, the IRS immediately contacts the individual to demand prompt payment of the balance. The individual must pay the back taxes or serious consequences will happen
Even if one believes they are experts in tax law and competent at filing their returns, they are still prone to common mistakes that lead to the assessment of back taxes. Such miscalculations in tax returns occur for many reasons. Transcription errors (truncating or adding a digit) can make a large impact on taxes paid. Although most notice such errors before submitting returns, a few of these errors persist. An IRS auditor would quickly assess back taxes based on an omitted digit in a large deductible. Another common error detected by an audit is that the taxpayer failed to correctly categorize a particular deducted expense. Even if the individual who filed the tax return disagrees with the auditor’s opinion, they are obligated to abide by his or her demands and pay back taxes. Therefore, after an audit demands the replacement or removal of a deduction, back taxes are immediately incurred. Various other misunderstandings result in the assessment of back taxes once a return has been audited.
Inability to Pay
Sometimes, back taxes result from an individual’s inability to pay their tax expense. This applies mostly to individuals who do not have their taxes automatically deducted from their paychecks. Those who must pay a sum of money all at once may find themselves in an unexpected situation that takes priority over paying taxes. Sometimes, emergencies require taxpayers to use some of the money originally set aside for taxes. For a lot of individuals, waiting to pay taxes all at once turns up to be a lot more overwhelming than initially anticipated. This applies especially to individuals who lack responsibility to set aside money to be used on paying taxes later. Whatever the case, such individuals are not excused from paying their taxes. Instead, the amounts that they would normally pay become back taxes. These back taxes must be paid as soon as possible to avoid fees and other consequences.
If one finds themselves in a position in which they are unable to pay their taxes (or back taxes for that matter), it is often useful to have a consultation with a tax lawyer who can reasonably estimate the appropriate amount and timing of future payments to take care of their new back taxes. Tax lawyers are also useful in reducing or, in rare cases, eliminating the amount due from back taxes. Although simple research can effectively add to an individual’s capabilities to tackle back taxes, it is best to seek the advice of a legal professional. Rather than taking time to filter through information about back taxes, an individual can contact a law professional and get direct straightforward answers quickly.
CONSEQUENCES OF BACK TAXES
The Difference Between Major and Minor Tax Negligence
First, it is important to note that the term “back taxes” is generally NOT meant to describe fraudulent or serious criminal behavior, although individuals who intentionally do not pay taxes could be considered to have a large amount of back taxes. If a taxpayer is found guilty of this crime (willingly neglecting taxes) or other related tax fraud crimes, then they have entirely different problems to deal with which may include jail time. Fraudulent behavior includes serious circumstances in which an individual neither pays their taxes nor files their tax return. The consequences for such individuals, however, are different and will not be discussed here.
Those who simply owe back taxes due to reasons other than evasion and related crimes, on the other hand, have much less severe consequences. These consequences can have a large impact on the finances of an individual. Sometimes, they can be quite devastating, especially if back taxes have been neglected for too long of a period of time. Therefore, taxpayers must quickly determine what they owe in back taxes and when they can pay it. There are various levels of financial penalties related to back taxes, depending on severity. In most cases, this is the only kind of action that the IRS will take on an individual regarding back taxes. It would be rare for someone to have to face jail time due to minor back taxes.
Penalties must be avoided at all cost, as it naturally adds to the burden already caused by the build-up of back taxes; an individual may unfortunately find themselves responsible for not only the original tax payment, but also for several penalty fees caused by lack of promptness. The optimal situation to make sure an individual never has penalties, of course, would be to take care of back taxes the moment they are discovered. Unfortunately, immediate payment is not always possible and the IRS will assess a fee as a result. This fee is in addition to any of the back taxes that are owed.
These penalty fees all depend on whether or not you have fulfilled responsibilities related to back taxes. This section will discuss the most common penalties, such as the one that may be assessed if an individual has back taxes and did not file a return for that year. Another example would be the fact that interest is accrued on the amount of back taxes owed. Various other penalties encourage taxpayers to stay on top of the game when it comes to paying their back taxes.
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.
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.
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.
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.
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.
Back taxes are most definitely a hassle to deal with, but they can also be avoided if taxpayers pay proper attention to compiling and adhering to their tax returns. If taxpayers remember to fill out their tax returns accurately and to turn them in on time, they should have no problem. If there is an error, however, and back taxes are assessed, they must be prepared to pay immediately. Failure to turn in the tax return can result in back taxes. Audits also reveal some otherwise hidden back taxes. Neglecting back taxes can result in various consequences, such as “failure to pay penalties” “failure to file penalties”, interest expenses, tax liens, and tax levies. Those concerned about back taxes can apply for installment plans to extend the payment period. The IRS will compromise and forgive certain debts depending on each situation. Bankruptcy can eliminate back tax debt and, although it is not normally recommended, waiting ten years generally makes back taxes disappear, although there are exceptions.
With all of this information in mind, back taxes become much less intimidating.
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How to Choose the Right Tax Representative
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