If you do not file your income tax returns on time or fail to pay taxes owed to the Internal Revenue Service (IRS) by the due date, you will fall behind on your taxes. Read on to understand the importance of filing back taxes and your options if you owe more money than you can pay.
According to the IRS, Americans owed more than $114 million in back taxes, interest, and penalties in 2020.
Owing back taxes to the IRS can feel burdensome. Many taxpayers keep putting off filing back taxes, but doing so can result in harsh penalties and interest. As a Fort Lauderdale tax attorney with over 30 years of legal experience, I offer personalized service to assist taxpayers through a variety of tax situations. If you owe back taxes, contact my firm, Zuckerman Law, LLC, to discuss your particular situation and options.
Why Is It Important to File Back Taxes?
The term “back taxes” refers to taxes that were not paid when they were due to the IRS. Taxpayers who owe back taxes to the IRS may receive a Notice of Deficiency from the federal agency. The notice informs the taxpayer that the IRS has identified additional taxes, penalties, or interest owed to the agency.
When you fall behind on your taxes, the importance of filing back taxes cannot be overstated. Consider the following reasons you need to file your back tax returns on time:
You only have three years to claim a refund. If you do not file back taxes on time, you risk losing your refund from the IRS. Under federal law, taxpayers have three years from the return due date to file back taxes and be eligible to claim a refund.
Limit the accumulation of penalties and interest. Filing back taxes on time will help you stop late filing and payment penalties as well as interest. If you do not file a tax return by the due date, you will start accumulating penalties and interest.
You may need tax returns for loan approvals. Certain types of loans, including mortgages, require proof of income. Filing income tax returns before applying for a loan could help increase your chances of approval.
Possible Penalties for Failure to File Back Taxes
Taxpayers who owe taxes to the IRS face the accumulation of penalties and interest if they fail to file tax returns on time.
Those who fail to file back taxes on time face a penalty of 5% of the unpaid tax amount for each month they fail to pay. The charges max out after five months (25%). For every month a taxpayer fails to pay on time, the IRS will charge from 0.5% to 25% of the unpaid taxes.
In addition to the penalty, interest will build up on an everyday basis. The interest rate for underpayments is the federal short-term rate plus three percentage points.
What if You Owe More Than You Can Pay?
If you cannot afford to pay the full amount of the taxes you owe, you may want to consider the following options:
Pay the IRS with a credit card or personal loan. While you may be required to pay interest to the lender, the amount may be less than the penalties and interest that will accumulate if you fail to pay the full amount to the IRS.
Use the Online Payment Agreement Application if you have filed your tax returns and owe up to $50,000. A short-term installment agreement gives taxpayers up to 120 days to pay their balance in monthly payments, while long-term agreements offer up to 72 months to pay.
Request an offer in compromise from the IRS. An offer in compromise allows taxpayers to settle their tax debt for less than the total amount owed to the federal agency.
Getting the Experienced Legal Guidance You Need
It is true that in most cases, filing your tax returns on time and paying your taxes in full can get you out of trouble. However, some taxpayers are not able to file back taxes on time for various reasons.
If this sounds like your situation, consider speaking with a tax attorney like myself. I take a personalized approach in working with clients to negotiate payment agreements and offers in compromise with the IRS. My firm, Zuckerman Law, LLC, proudly serves clients in Fort Lauderdale, Florida, as well as Miami, Boca Raton, Sunny Isles, and throughout Southern Florida.