How To Handle Back Taxes
Navigating the tangled landscape of back taxes can feel like being caught in a thorny thicket. Believe me, you aren’t trekking this rough path alone. In fact, research illustrates that a staggering number of Americans owe more than $130 billion in back taxes, not to mention penalties and interest.
It’s overwhelming, right? Rest assured though – this blog post is intended as a practical guide to managing your tax debt responsibly and with efficiency. Are you yearning for some financial tranquillity? Well then, let’s dive right into it!
Key Takeaways
- Back taxes grow over time due to fees and interest. Pay them off fast to avoid this.
- The IRS has help plans like “payment or installment plans” that let you pay back money over time.
- Penalty abatement can cut down late payment fees. You need a good reason for it.
- Tax relief companies can help with your tax problems. Pick one with care as some are scams.
Understanding Back Taxes
Back taxes are what you owe the IRS. They come from not paying all of your tax bill in a past year. Your back tax debt can get bigger over time. This happens because the IRS adds interest and penalties to what you owe until it’s all paid off.
Paying back taxes is important. If you don’t pay, the government may take action against you. They could seize money from your bank account or paycheck, for example. There are ways to deal with this problem though, like an IRS payment plan or other forms of tax relief.
The Importance of Dealing with Tax Debt
Paying off tax debt is very important. If you don’t pay, the IRS may take serious actions. They could take your house or even your paycheck! Also, tax debts can grow over time because of interest and fees.
The longer you wait to deal with it, the more money you will owe. It’s best to start working on a plan as soon as possible to stop this from happening. Ignoring tax debt won’t make it go away; it can only make things worse in the future.
Common Tax Relief Options
There are several avenues for potential relief from back taxes – such as IRS payment plans, offers in compromise, currently-not-collectible status or penalty abatement. To fully understand which option best suits your circumstances and how to navigate these potentially complex processes, read on!
IRS Payment or Installment Plans
The IRS has a great plan for people who owe money! It’s called the “IRS payment or installment plans“. They let you pay your tax debt over time, just like paying off a car loan. If your bill is more than $25,000 though, the payments need to come straight from your bank account.
These plans are simple to set up but be aware that late fees and interest will still add up over time. Also, if you pay with cards or digital wallets there could be extra charges. So it’s best to choose this plan only if you really need it!
Offer in Compromise
An Offer in Compromise is a plan to help you with your tax debt. It lets you pay less than what you owe. The IRS offers this option for people going through tough times. They look at how much money you make, what you own and how much money you spend every month.
When they have these details, they figure out an amount that works for both sides. This plan comes with a fee of $205, but some people may not need to pay it if their income is low enough.
You must also make sure all your past-due tax returns are filed before the IRS accepts your offer.
“Currently-not-collectible” Status
The “Currently-not-collectible” status offers help to taxpayers. If you can’t pay your tax debt, this status is an option. The IRS stops asking for money when you have this status.
But not everyone gets it; you must show the IRS that paying them would cause hardship. This means it’s too hard to meet basic needs like food and rent if you also pay your tax debt.
Also, all of your tax returns need to be filed before getting this status. However, remember that fees and interest pile up even in this state.
Penalty Abatement
Penalty abatement is when the IRS lets you pay less. You can use it if you cannot pay your full tax bill. For example, let’s say you owe money and did not pay on time. The IRS could give fees for late payment.
If you apply for penalty abatement, these fees may get cut or even removed.
Applying for this relief option is not always easy though. Often, the IRS asks you to show a good reason why they should give it to you. This could be due to life problems like losing your job or getting sick.
You need papers to prove this reason too.
There are programs that help with penalty abatement as well! One popular one is called the Fresh Start program from the IRS itself. But remember: while penalty abatement cuts off some fees, interest on late payments still adds up.
Hiring a Tax Relief Company
Hiring a tax relief company can be tricky. Some might trick you and take your money. They promise to cut down your debt but don’t deliver results. You should always cross-check before picking one.
Look for their past work and reviews from other clients. A good tax relief company will help you sort out your taxes with ease. Plus, they know all the rules and can find the best payment plans or discounts for you.
Just make sure that they don’t ask for large upfront fees as this is a sign of scams according to the Federal Trade Commission.
Step-by-step Guide to Handling Back Taxes
Don’t be overwhelmed by tax debts; we’ve got a comprehensive step-by-step guide to handling back taxes, making the process manageable and less stressful. Dive in to learn how consulting a professional, filing your returns, getting on a payment plan and actively addressing debt can bring financial relief.
Keep reading for more valuable insights!
Consulting with a Tax Professional
Talking to a tax professional is a smart move. They know all about tax relief, back taxes, and much more. CPAs can guide you in finding the best way to handle your tax debt. But before starting any work, check their track record and credentials! You don’t want to get help from someone who can’t do the job right.
Filing Your Tax Returns
First, you need to file all your tax returns. Look for the last six years’ worth of forms. It is a rule from the IRS. You must do this even if there are taxes you can’t pay right now.
This step helps put you in good standing with the IRS.
Next, fill out each form with care. Make sure to use correct details and amounts. Don’t guess or make things up; it can lead to trouble later on! After checking them over, send your forms off to the IRS.
Getting on a Payment Plan
I set up a payment plan with the IRS. This is one way to take care of tax debt. I chose this because it lets me pay my back taxes in pieces over time. It’s like an installment agreement.
But, this didn’t stop the late fees and interest from growing on my unpaid taxes. The IRS made me do automatic withdrawals from my bank account because I owed more than $25,000. After I used a debit card to make some payments, I found out about extra processing fees that were taking money too.
As a lower-income person, these things hit me hard but there was some help! They let people like me not have to pay any setup fee for getting on an IRS payment or installment plan.
Aggressively Addressing Your Debt
Paying off the tax debt fast is key. Sell unwanted items, cut back on extras or get a part-time job for extra cash flow. Use that money to pay your debt. If you owe more than $10,000 in taxes and can’t pay right away, hire a pro from a tax relief company.
The Role of Tax Relief Companies
Tax relief companies serve a crucial role in helping individuals navigate through complex tax debts. They have expertise in understanding the intricacies of tax laws and use this knowledge to negotiate with the IRS on your behalf.
These firms can develop strategies such as payment plans or offer-in-compromise that may significantly reduce your owed amount. However, it’s important to be cautious while engaging their services as some might require hefty upfront fees without necessarily delivering results.
How They Work
Tax relief firms have a role. They talk to the IRS for you. First, they study your tax issue. They look at unpaid taxes and late fees. Next, they make a plan that fits you best. It may be a payment plan or a tax cut.
These companies send trained people to fight for you. They know all about IRS rules and can help stop scary letters from the IRS in your mailbox. Money is needed to hire these firms but it can save stress and time dealing with tax issues on your own.
Potential Advantages and Disadvantages
When considering hiring a tax relief company, it’s important to evaluate potential advantages and disadvantages. Here is a comparison:
| Advantages | Disadvantages |
|---|---|
| Tax relief companies have experienced professionals who can help interpret the complex tax laws and help you negotiate better terms with the IRS. | Some tax relief companies may be fronts for scam artists, so caution is advised. |
| They can offer a variety of tax relief options, such as installment plans or offers in compromise, depending on your situation and eligibility. | Offers that seem too good to be true often are. The IRS accepts fewer than half of the requests for offers in compromise, so be wary of companies that guarantee results. |
| They can save you time and stress by handling communications with the IRS on your behalf. | You will need to pay for their services, and these costs can sometimes be high. It’s important to weigh the potential benefits against the costs. |
| A tax relief company can help prevent or stop wage garnishments, liens, and levies issued by the IRS. | Not all tax relief companies are credible or reliable. It’s important to research any company thoroughly before deciding to use their services. |
Before deciding on any course of action, it’s advisable to consult with a tax professional or certified public accountant (CPA). They can provide valuable guidance based on your specific circumstances.
Frequently Asked Questions
In this section, we’ll tackle some of the most common queries about handling back taxes, aiming to clear up any uncertainties you may have. We’ll answer questions such as “How many years can you file prior year tax returns?” and “How long does it take to receive your tax refund?”, among others.
This is your chance to get more clarity on these important topic areas.
How many years can you file prior year tax returns?
You can file prior year tax returns for up to six years. The IRS needs you to send in the last six years of tax returns. This is their rule if you want to be in good standing with them.
Don’t hold off on sending in old tax returns, it’s always smart to follow these rules and stay on top of your taxes.
How long does it take to receive your tax refund?
You may wonder about your tax refund time. For most people who file their taxes online and ask for a direct deposit, it takes about 21 days. But if you send in paper forms, it can take between 6 to 8 weeks.
This is because paper forms take more time for the IRS to process.
Sometimes things might slow down your tax refund. If something on your return does not look right to the IRS, they will need more time to check it. The same goes if the IRS thinks someone might be trying to steal your identity or commit fraud with your tax return.
Conclusion
To handle back taxes, know what you owe first. Next, find help from a tax expert. You may also seek relief options like payment plans. Lastly, make sure to pay your debt in time to avoid more fees.
