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IRS back taxes are unpaid federal taxes that are past due. The Internal Revenue Service assesses them after the taxes are filed. If a taxpayer has any unpaid taxes, IRS will move to recover the money, which can be done in a number of ways.
Types of IRS Back Taxes
IRS back taxes are levied for one of the following reasons:
- A taxpayer prepares and files the tax return without paying the money owed. This is the most common cause of IRS back taxes. The taxpayer owes IRS the unpaid amount, as well as a "Failure to Pay" penalty fee.
- A taxpayer files the tax return and pays the money owed, but he doesn't account for all the income he or she earned during the previous year. This is determined by comparing the tax return and the records from employees and financial institutions that paid the taxpayer. If there is a discrepancy that the taxpayer cannot account for, he or she will owe IRS the difference.
- A taxpayer does not file the tax return at all. In these cases, IRS can file one on his or her behalf. The taxpayer would owe whatever IRS calculates. The IRS estimate does not account for any exceptions, credits and deductions the taxpayer may be entitled to.
Consequences of Unpaid IRS Back Taxes
In order to recover the money the taxpayer owes, IRS may take at least one of the following actions:
- File a Federal Tax Lien - A federal tax lien gives IRS a legal claim to all of taxpayer's property as security or payment for the taxes owed. This includes anything the taxpayer acquires after the lien is filed. If left unresolved, federal tax lien can harm the taxpayer's credit rating and undercut his or her ability to take out loans and make large purchases. IRS is required to do everything in its power to notify the taxpayer that the lien has been filed. If the taxpayer repays the debt in full ten days after the notification is sent, the federal tax lien is revoked.
- Impose an IRS tax levy - IRS tax levy allows IRS to cease and sell any of taxpayer's property. This step is usually taken if Federal Tax Lien fails to achieve desired results. The taxpayer is notified thirty days ahead of time. The taxpayer has a right to request a hearing within that time period. Levies of real estate and personal belongings tend to be regarded as the last resort, which is why levies of financial assets are far more common. They include:
Bank Levies - IRS withdraws the amount owed direct from the taxpayer's bank account.
Wage Levies - IRS takes a certain percentage of the taxpayer's wages and earnings. IRS can take up to 85% of the taxpayer's wages.
Resolving the IRS Back Taxes
There are many steps the taxpayer can take to either reduce or eliminate his or her back taxes. They include:
- Pay them back in full - The simplest way of handing the situation. If done in a timely fashion, it allows the taxpayer to avoid the above-listed penalties.
- Enter into an Installment Agreement with IRS - if the taxpayer cannot pay all of the money owed at once, an installment agreement can be issued to allow the taxpayer to pay the IRS back taxes in more affordable portions. In order to be eligible for this agreement, her or she must have all the federal tax returns in order.
- Negotiate an Offer of Compromise - under it's auspices, IRS agrees to reduce the amount the taxpayer owes. The offer hinges on the taxpayer's Reasonable Earning Potential - IRS's estimate of how much he or she can pay given their current financial circumstances.
