Back taxes are any taxes not paid during prior tax years. The United States Internal Revenue Service estimates 8.2 million Americans owe a combined tax debt of $83 million in back tax debt. Owing back taxes can greatly affect the quality of someone’s life, but misinformation, not being able to pay, and fear of penalties prevents many debtors from contacting the IRS. People who owe back taxes often describe this fear and the looming debt as a weight on their chest or a dark cloud that follows them everywhere. This article seeks to shed some light on not only what can happen when back taxes are not paid, but also provide five ways of settling this debt with minimal damage to the debtor.
When back taxes are owed, the Internal Revenue Service will not hesitate to impose fines, put liens on property, garnish wages, and place levies on bank accounts. Federal laws allow the IRS to garnish up to 25 percent of your wages or the amount of your income that is over 30 times the minimum wage until the tax debt is paid. These laws also allow the IRS to place a levy on a debtor’s bank account, which means the IRS can take all of the money in the account towards the tax debt.
The most direct solution for anyone owing back taxes would be to contact the Internal Revenue Service and get them paid, but it can be next to impossible to pay IRS penalties and afford basic needs. However, it is possible to pay back taxes, avoid the harsher penalties, and live a normal life.
Option #1: File for Currently Not Collectible (CNC) Status
Currently Not Collectible status is available through an IRS financial hardship program. The ideal candidate for CNC status is able to prove he or she has little or no money left after paying basic expenses, such as food, rent, and utilities. CNC status ceases collection for a time so that the debtor can gather the resources to pay the debt. Although CNC provides temporary respite from looming tax debt, the debt does not go away, continues to accrue interest, and the IRS will withhold any future tax refunds towards the debt (commonly known as a refund offset).
Anyone interested in determining if CNC status is a good fit for their situation should first contact a qualified tax professional. The second step is to gather the following documents for your appointment:
- A monthly list of expenses (i.e. food, rent/mortgage, utilities, child care expenses, student loan payments, alimony and/or child support, transportation, monthly dues, etc.)
- Three months of bank statements
- Proof of payment for any unusual expenses, such as medical bills
The tax professional will then guide the debtor through determining his or her disposable income and whether to complete Form 433-A or Form 433-F. The tax professional can also help the debtor develop a plan of action to gather the money owed during this deferment period. Once the forms are submitted, the IRS will then evaluate the debtor’s case and determine if he or she is a good fit for CNC status and how long of a deferment period he or she will have.
Option #2: Set up an Installment Agreement
When an individual owes back taxes, the IRS’s main goal is to collect and will often work with him or her to develop a payment plan. The ideal candidate for a payment plan does not meet the criteria for CNC and the combined debt is less than $100,000. Although the fastest way to set up an IRS installment plan is online, applicants can also do so by phone. Applicants will need the following information when applying for an IRS installment plan:
- Name exactly as it appears on the most recent tax return
- A valid email address
- Address as it appears on the most recent return
- Date of birth
- Filing status (i.e. married or single)
- Social Security number of all parties on the return
- Transcript and/or PIN from any previous IRS installment plans
Option #3: Make an Offer in Compromise
An Offer in Compromise (OIC) is exactly what it sounds like: a debtor’s offer to the IRS to settle his or her tax debt for less than the amount owed. An ideal OIC candidate will have filed all applicable tax returns, is unable to pay or does not qualify for other options, and has made all tax payments for the current year. Once the amount is agreed upon by both parties, Offers in Compromise can be paid in lump sums or periodic payment offers. The IRS takes the following factors into account when evaluating an applicant for an OIC:
- Is there doubt or a dispute as to how much is owed?
- Is there doubt regarding the collectibility of the entire debt?
- Would collecting the full amount cause the applicant financial hardship?
Option #4: Ask for a Penalty Abatement
For individuals who have never been delinquent on their taxes before, the IRS offers the First Time Penalty Abatement Program. This program allows debtors to receive some relief from penalty fees while paying back taxes. Abatements only cover fees from a single tax period and will only be granted if:
- Filing a tax return was not previously necessary for the debtor.
- The debtor has not incurred tax penalties for the three previous years.
- The debtor has filed all currently due returns or an extension to file.
- All fees are paid or a suitable payment arrangement has been made.
Option #5: Ask for Full Forgiveness of the Tax Debt
The IRS will grant individuals who owe back taxes full forgiveness of their tax debt, although this is incredibly rare. In addition to demonstrating an inability to pay back taxes owed, an individual who may be a candidate for full forgiveness will have to prove his or her debt is past the statute of limitations. The most common way individuals demonstrate an inability to pay is through Chapter 7 bankruptcy.
Owing back taxes is difficult and anxiety-inducing under the best of circumstances. Individuals who owe back taxes often feel trapped. However, with the help of a qualified tax professional and knowledge of these five options, there is hope for any individual who wants to resolve his or her back tax debt.