What Are Back Taxes?

How Back Taxes Work

Back taxes are payments to the government that weren’t made when they were supposed to be paid. Back taxes often apply to prior tax years when income taxes were not paid. You can owe back taxes at the federal, state, or local level.

Many people owe taxes because they didn’t have enough money withheld for taxes from their paychecks throughout the year. Some people may also owe because they were unaware that unemployment benefits are taxable most years, and they didn’t have money automatically withheld. Selling stock or other investments at a profit could result in capital gains taxes, which you must report. You could also wind up owing taxes because you made a math error or deliberately under-reported your income.

Whenever you go without filing taxes or paying your tax bill for months or years, you owe back taxes.

Example of Back Taxes

For example, let's say you started a consulting business and are self-employed. Two years ago when you began, you didn't know you were supposed to pay the employee’s and employer’s share of Social Security and Medicare taxes. You also didn't know you were required to make quarterly estimated tax payments, which are due when you expect to owe at least $1,000 when Filing a tax return. You never paid these taxes two years ago and now you owe back taxes to the government. You will likely now face penalties.

Penalties for Not Filing Taxes

There’s a difference between failing to file a tax return and owing back taxes. Generally, the consequences of owing back taxes are less severe if you’ve filed on-time returns, so it’s essential to submit a return even when you can’t pay your taxes in full.

The penalties are as follows:

• Failure to file: You’ll owe interest plus a 5% penalty for each month the return is late, up to a maximum of 25% of the tax bill.
• Failure to pay: You’ll owe interest, plus a 0.5% monthly late fee.

The IRS can submit a substitute return for you if you don't file a tax return, which might not include credits and deductions that could offset the taxes you owe. It will send you a bill demanding that you pay in full, and interest and late penalties will begin to accrue if you file a return but don’t pay the full amount you owe.

Do I Have To Pay Back Taxes?

Not everyone will owe back taxes if they’ve neglected to file a return. In fact, a lot of people will find the IRS owes them a refund when they file a tax return. You might receive a tax refund if you had more taxes withheld than you needed, or if you qualify for certain tax credits, such as the earned income tax credit.

You're required by law to pay if you do owe back taxes. The IRS has 10 years from the time your taxes were due to collect them.

Some companies claim that they can settle your tax debts for you, but very few taxpayers will actually qualify for the programs these companies advertise. Working with the IRS when you can’t pay your taxes is typically a better option. In fact, the Federal Trade Commission (FTC) warns that settlement companies often leave people with even more debt.

What Happens if I Don’t Pay My Back Taxes?

Due to penalties and interest, your tax bill will continue to grow each month until it's paid. Future tax refunds that you're eligible for will be applied to your back taxes through the Treasury Offset Program. 

The consequences can be even more severe if your tax bill becomes seriously delinquent. The IRS can garnish your wages or Social Security benefits, or seize your bank accounts and other property. It can also attach a tax lien to your property so the government gets its cut before you receive your money if you sell it. Under some circumstances, your passport application can be rejected due to delinquent taxes.

How To Pay Back Taxes

Your first step is to file back tax returns if you owe back taxes. Locate the IRS forms for the years you didn’t file returns, because tax laws and forms can change from year to year. You can request past years’ tax documents, like old W-2s and 1099s, by submitting Form 4506-T to the IRS.

Interest and late penalties will continue to accrue under both types of plans, but you'll incur late fees at a reduced rate of 0.25% per month instead of the typical 0.5%. The IRS won’t pursue collection actions like seizing assets or garnishing your wages as long as you make your payments as agreed.

If you can’t afford to pay anything toward your tax bill, you may have other options. You can request that your account be reported as currently not collectible, which means that the IRS will temporarily pause collection efforts. You’ll still owe the tax debt, plus interest and late payments. Under some circumstances, the IRS might agree to an offer in compromise, where you settle your debt for an amount lower than what you actually owe.

Frequently Asked Questions (FAQs)