Nobody wants to be in debt, especially not for tax reasons. Back taxes add additional stress to those already under financial burden. The task of paying back taxes may feel daunting at first, but there are several ways to remedy the situation.
Gain a better understanding of how back taxes work, how to file back taxes, and how professionals can help you maintain your financial security.
What Are Back Taxes?
Back taxes are a term for unpaid taxes that were not paid in full by the expected due date. Back taxes can be owed at the federal, state, or local level. Even partially paid taxes are subject to the same consequences as unpaid taxes, such as the seizure of property or assets, tax liens, wage garnishes, or possible jail time.
Common reasons for owing back taxes include:
Failure to Report Income
All income, including that made from services you do in exchange for money outside of a standard job, should be reported to the IRS. Selling items online, gambling winnings, or gig work is often left off of tax returns either accidentally or intentionally, leading to a miscalculation in earnings and possible back tax consequences.
Example: Jay sells t-shirts of his artwork online as a side job. He receives about $500 monthly from these shirt sales or $6,000 yearly. Jay forgets to record this income at the end of the fiscal year and does not pay taxes on it, leading to back taxes for the $6,000 income.
Receiving a bump in pay is great, but depending on your current income, your increase could put you in a new tax bracket. For a single person,income between $10,275 and $41,775 is taxed at 12% while between $41,776 and $89,075 is taxed at 22%. This increase, and a failure to adjust your withholdings, could leave you owing back taxes.
Example: Amber is a single woman currently making $40,000 per year. She receives a Christmas bonus of $5,000. She forgets to adjust her withholdings and is now taxed at 22% instead of her anticipated 12%.
Not Enough Withheld from Pay
If you recently got a new job or changed position, you will have filled out paperwork for your employer, one of which was a W-4, a tax form to determine how much your employer will withhold from your paycheck. If you filled out the W-4 incorrectly, you could be hit with back taxes because you didn’t withhold enough from each paycheck to cover your expected taxes at the end of the year.
Read about how to properly fill out a W-4 form or adjust an existing one.
Example: Stacy is a single woman making a salary of $50,000 a year. Her employer withheld 12% of her paycheck every two weeks. Since Stacy is making $50,000 a year, she is in the 22% tax bracket, so withholding 12% is not enough, and Stacy owes more in taxes.
Capital Gains Tax
You could owe capital gains tax if you bought and sold cryptocurrency, real estate, or stocks for a profit. Capital gains taxes are calculated based on the increase in the value of the asset.
Example: Robert buys $1,000 in stocks in Company X. Two years later, he sells them for $10,000. He will owe taxes on the $9,000 profit, usually no higher than 15% for individuals.
Deductions reduce the amount of income before tax is calculated. This reduces your taxes paid. If you expected more reductions and miscalculated your taxes owed, you could be hit with back taxes.
Example: Each year, Abby files a Student Loan Payment deduction for her $350 monthly student loan payments. Because the Department of Education paused student loan payments during the Covid-19 pandemic, she was unable to deduct her payments, leading to her being taxed on the income that would be deducted of $2,500 maximum.
Loss of Dependents
When kids turn 19 or 24, if they are enrolled in school, they are no longer considered dependents and can no longer be claimed on your tax refund. Any tax credit you may receive for dependents will end at that time.
Example: Mark’s son turned 18 in July and is now working in construction. When Mark files his taxes at the beginning of the following year, he may owe more taxes because he can no longer receive a deduction for him as a dependent.
Why Should You File Back Taxes
If you owe back taxes, you must pay them as soon as possible. If you have not yet filed, you will still need to know whether or not you can pay the full amount.
If you don’t, you risk several consequences beyond the interest and late payment penalties, such as:
Claim a Refund
If you fail to file your tax return, you risk the loss of any potential refund you may have received. If you file your return within three years of the return due date, you may be able to receive your return.
Protect Social Security Benefits
If you are self-employed, tax returns are reported to the Social Security Administration to receive credits toward Social Security retirement and disability benefits. A delayed or unfiled tax return will cause you to forgo those benefits.
Avoid Issues Obtaining Loans
Copies of your tax returns are submitted to financial institutions such as mortgage lenders or brokers to verify your income. If you want to buy a home, refinance your mortgage, or get a business loan, you will be unable to provide the required materials. Filing a tax return, even late, ensures you don’t have issues obtaining these loans in the future.
Avoid the Risk of Being Audited
When you file a late tax return, there is an increased chance of being audited. When you file, it is a good idea to protect yourself from future audits with audit defense insurance. For as low as $29 per month, you can receive personalized professional assistance in defending your return.
How Late Can You File?
If you file your taxes late, even one day, without asking for an extension, you will be subject to fines, often up to 5% of the total amount you owe for the year. If you know you cannot file on time, you can ask for a 6-month extension. But remember that this is just an extension of filing your taxes. The taxes you owe will still need to be paid by the deadline. If you fail to pay by the original deadline, you will face penalties and interest fees.
4 Best Ways to File Late Tax Returns for Previous Years
If you owe back taxes or haven’t filed your returns from previous years, the IRS recommends three ways to get up to date and in good standing.
1. File Online
One of the fastest and easiest ways to file late returns is to file online through the IRS or through one of several companies that offer tax return filing services. You can file several years of back taxes through these providers, though each may have special rules or procedures for tax returns more than a few years old. The IRS will not allow you to claim benefits or rebates on tax returns over three years old.
TurboTax is one of the most trusted names in tax filing and offers past return filing services. They can help you file up to three years of back taxes, and they require you to use the correct year’s forms for each filing, so if you wanted to file your 2019 taxes, you’d need to use a 2019 form from the IRS rather than a 2020 tax form or this years form available on TurboTax’s website.
TurboTax offers a free version and a more popular professional version which is $59 for Federal taxes and $49 for state taxes.
TaxSlayer is an excellent online service that can help you file up to three years of back tax returns and ensure that you file the correct documents with the IRS.
Like TurboTax, TaxSlayer offers a range of different plans and levels of professional assistance ranging from $0 for basic assistance to $54.95 for professional assistance.
PastYearTax is a company that specializes in helping customers file their missing previous year’s tax returns. They can assist you with up to three years of back returns. They offer similar services to TurboTax and TaxSlayer, with extra options like audit assistance and professional review of your returns.
PastYearTax is less expensive than other options, at $14.99 for Federal returns or $39.99 for combined State and Federal returns.
2. File by Mail
In addition to filing online, it is also possible to file via mail. Like filing online, you can file up to three years of back taxes, and you must file using the correct year’s form, not this year’s form for a previous year.
How to File a Back Tax Return by Mail
You can file back tax returns by mail simply by printing off the forms from the IRS’ website and mailing them in using standard USPS mail services, or you can use a service provider who can ensure you send the correct forms to the proper location.
Free Tax USA can help you send up to seven years of past tax returns by mail for free. Simply follow their steps, including:
Step 1: Compile your tax documents.
Step 2: Fill out your tax forms and file them on Free Tax USA’s website.
Step 3: Mail your form to the IRS.
Step 4: Get word back and possibly receive a refund that may be waiting for you. If you are owed a refund, there is no penalty for filing late, but you can only file and get a refund for the previous three years.
3. File in Person
If you live near an IRS office, filing your back tax returns in person may be a good idea. Your nearest Taxpayer Assistance Center will accept up to three years of back returns and payments in person, which can be a quicker, more convenient option than filing online or by mail.
How to File a Back Tax Return in Person by Visiting Your Local IRS Office (Taxpayer Assistance Center)
You can file your tax returns in person at a Taxpayer Assistance Center, but the employees will not help you prepare or fill out any documents or forms. They can only receive your submissions, process any payments, and answer questions you may have about the process.
If you need assistance, it is better to use a company like Free Tax USA to help you prepare all necessary documents before you visit the Tax Assistance Center to ensure that your visit goes smoothly. If you want to visit a Taxpayer Assistance Center in person, you should:
Make an Appointment
The IRS requests that you call 844-545-5640 to schedule an appointment with your local TAC office.
Prepare All Documents
Prepare all the documents you need and fill out the proper year tax return form.
Your tax return will let you know how much you owe the government; prepare this payment in advance in cash, mobile money payments, paying at a partner company, using a money order, or cashier’s check.
4. File with Tax Shark
Tax Shark is here to help taxpayers who need help filing back taxes.
How to File Back Tax Returns with Tax Shark
Step 1: Visit the Back Taxes Help page.
Step 2: Order the appropriate back taxes filing service.
Step 3: Upload your tax documents for the ordered year into the portal. Order the “Don’t have your documents?” add-on if you need help filing your return without documentation.
Step 4: Upload a copy of the most recent tax return that you did file.
Step 5: Be prepared to assist with additional information or requests.
How to File Back Taxes Without Records
You will need records of your wage and income to file your back taxes correctly, but you may not have all required documents. You can request up to 10 years of records and transcripts (current year and nine prior tax years) directly from the IRS.
Get Tax Transcripts from the IRS
You can get your past transcripts from the IRS online using their Get Transcript Online system, by mail, or by calling 800-908-9946. The online system allows you to view, print, or download all transcript types. If you get your records by mail or phone, allow 5-10 business days for delivery, and only tax returns or tax account types can be requested. There are five types of transcripts:
1. Tax Return Transcript
A tax return transcript will show most line items from your original Form 1040-series tax returns as well as any forms and schedules but will not show any changes you made to it after filing it with the IRS. This option is available for the current and previous three years of tax returns.
2. Tax Account Transcript
A tax account transcript shows your basic tax information, including your taxable income, filing status, and previously used payment types. It also shows any changes you made after filing your original return. It’s available for the current year and the previous nine tax years.
3. Record of Account Transcript
A record of account transcript is a combination of the tax return and tax account transcripts mentioned above into one transcript. It’s available for the current tax year and the three prior.
4. Verification of Non-Filing Letter
A verification letter states that the IRS has no record of a Form 1040-series tax return though it doesn’t state if you were required to file one that year. It’s available after June 15 for the current year or the previous three years.
5. Wage and Income Transcript
A wage and income transcript will show all the income filed with the IRS via Forms, including 1099s, W-2s, 1098s, and 5498s. This transcript is limited to 85 income documents and will not be generated if you have more than that. Alternatively, you can file Form 4506-T to get a complete transcript.
Gather Bank and Credit Card Statements
You need to gather all your bank and credit card information so the IRS can verify how much money was deposited and spent in a given year. Your bank and credit cards should be able to provide you with these documents upon request.
Get W-2 Info from Employer or Payroll Provider
To get your W-2 information for the year you wish to file back tax returns for, you must contact your company or organization that provides you with an annual W-2. You will most likely need to meet with the company’s payroll division or the third party that takes care of their payroll.
If Self-Employed, Get Income Information from Your Business Payment Processor
If you are self-employed and do not have a W-2, 1099, or similar form, you still need to show the IRS how much money you earned in a given year. You need to provide receipts from credit card companies, payment processors, or physical receipts for cash transactions so the IRS can verify your return.
Find 3rd-Party Miscellaneous Income - (Venmo, eBay, etc.)
If you make money from non-traditional sources like cash transfer apps like Venmo or Cash-app or websites like eBay, Etsy, or Facebook Marketplace, you should gather as many receipts, transaction records, or income statements as possible.
No Luck? Hire Tax Shark
Gathering all the information necessary to file a tax return properly can be difficult and time-consuming, but the tax professionals at Tax Shark can help.
We can let you know what information is needed, how to properly document your return, and help you understand the IRS requirements so that your return is accepted and your back taxes cleared in a timely and cost-effective way.
What is the Penalty for Failing to File Taxes?
Failing to file taxes can be a serious problem. While the IRS doesn’t actively pursue those who fail to file, if caught, you could face a range of punishments of increasing severity.
The standard failure-to-file penalty is 5% of the total amount of tax owed per month that the tax return is late.
So if you owed $1,000 in tax, you would need to pay a $50 penalty each month up to 25% of the total amount owed, or in this case, $250. You will also incur interest on the amount you owe, so you will pay more when you pay your tax bill.
More Than 60 Days Penalty
If your return is more than 60 days late, you must pay a minimum of $435 or the full amount of tax owed, whichever is smaller.
Failure to File Exemptions
A few circumstances allow you to avoid a failure to file penalty. If you are owed a return, and you have up to three years to claim your return without incurring a penalty. You can also file for a 6-month filing extension if you cannot submit your return in time, and you can apply for a payment plan if you cannot pay your tax bill on time.
How to Pay Back Back Taxes
The IRS offers several payment options for those who owe back taxes, including:
You can pay the IRS using a direct deposit from your bank or financial institution’s checking or savings account. This service is free.
Electronic Fund Withdrawal
You can pay directly from your bank account if you e-file your returns via the IRS’s internet portal. This option gives you more flexibility as you can schedule the withdrawal whenever you like.
Pay With Cash
You can pay in cash at an IRS Taxpayer Assistance Center or participating retail partners in your area. There is a $1.50 fee for paying in cash, and some retail partners limit per-day payments to $500.
If your tax bill exceeds $10,000, the IRS requests that you let your local TAC know when you schedule your appointment so they can prepare to receive such a large amount of money.
Credit or Debit Card
You can pay your taxes online using a credit or debit card via third-party payment processors. There is a minimum fee for debit cards of $2.20 and 1.87% for credit cards, depending on which processor you choose.
If you cannot pay your entire tax bill at one time, you can apply for a range of short-term and long-term payment plans with the IRS. A range of conditions apply, but it is an option available to all taxpayers in need.
What if I Can’t Afford to Pay Back Taxes?
If you cannot pay your back taxes in part or in whole or if you have a history of failure to pay penalties, you can take steps to settle your tax bill. The IRS offers multiple programs and payment plans that can help you. Various corporations and organizations also offer tax relief counseling or services.
Pay by Credit Card
You can pay your back taxes with your credit card, which could give you a way to pay off your tax debt through your monthly credit card bill. While this can work for some, credit card fees can be steep and could quickly become difficult to pay. The average credit card interest rate is 16-18%, which could be far more costly than an IRS tax relief or installment plan.
Qualify for a Tax Relief Program
The IRS offers multiple tax relief programs for qualified taxpayers. Each plan has its own rules about who qualifies and what benefits are afforded, including:
Installment Agreement (IA)
The IRS offers payment installment agreements for taxpayers with less than $10,000 of tax debt, not counting any penalties or interest. Taxpayers with less than $50,000 may qualify for a similar streamlined agreement. These agreements allow you to pay your bill in installments over a predetermined time.
Offer in Compromise (OIC)
The IRS offers the option of an Offer in Compromise To taxpayers who have filed all their returns and have made all estimated payments for one year. The Offer in Compromise will be a lump sum or a periodic payment that pays off a portion of a tax debt that does not exceed what the IRS believes is the maximum collectible amount.
Currently Non-Collectible Status (CNC)
If you make less than $84,00 per year, are unemployed, or have no money left after paying your basic living expenses, you may qualify for Currently Non-Collectible Status. This will not make your debt disappear but will suspend the collections process. You will still incur interest and potential penalties on your debt, but you do not have to pay until you are able.
First-Time Penalty Abatement (FTPA)
The IRS offers Penalty Abatement for first-time offenders if you have paid your taxes in the last three years, it is your first time failing to file or pay properly, and you haven’t received any penalty in the last three years.
Innocent Spouse Relief
If you are the current or former spouse of someone who owes back taxes or is in tax debt with the IRS, and you can prove that you had no knowledge of the incorrect tax form or incorrectly reported income, you can apply for Innocent Spouse Relief. This program relieves a current or former spouse of their joint tax burden.
Get Tax Resolution Services
The IRS offers many tax resolution services, but the eligibility rules can be complicated, and negotiating with the IRS as an individual can be complicated. One of the best ways to ensure that you make the most of the programs the IRS offers is to use a tax preparation or Tax Resolution Service like Tax Shark.
These companies can help you negotiate the bureaucracy and use experienced, professional negotiators to negotiate with the IRS on your behalf.
Considerations with Filing Back Taxes
When you decide to file back taxes, there are some important considerations you need to understand. While filing back taxes will help you return to good standing with the IRS and help your finances get back on track, it can be an expensive process that opens you up to audits in the future.
One of the best ways to ensure that you fix your back tax issue correctly is to seek back tax assistance from an experienced tax assistance company and authorize them to speak to the IRS on your behalf.
Consider if You Can Pay Your Tax Bill
Before you file a back tax return, it is essential to know if you will be able to pay your tax bill in full or if you will need to apply for an assistance program. If you understand your finances before you begin the process, it will help you along the way.
Consider How Many Years of Back Taxes You Owe
If you have failed to give the IRS their due tax return for one or two years, settling your back tax issues should be relatively straightforward. It will be a more complex process if you have more than six years of back returns.
If you owe many years of back returns, it is a good idea to work with a knowledgeable Tax preparation and resolution company to ensure the process is done correctly.
Here are the answers to some common questions about filing back tax returns.
There is no limit to the number of years you can go back and file back taxes.
The statute of limitations for tax liability is ten years.
The number of years will vary by state, but most stick to the federal guideline of ten years.
If you marry someone who owes back taxes, you will never be legally responsible for repaying those debts.
The best way to negotiate back taxes with the IRS is through the offer in compromise (OIC) program or arrange an installment agreement.
Before filing without a W-2 from your employer, you should try everything you can to get the W-2 to make it easier. If not, you will have a harder time proving your income and must fill out Form 4852.
After death, the IRS will pursue the estate for the amount owed in back taxes.
Yes, the IRS can levy Social Security to pay off back taxes.
To find out if you owe back taxes, you can register an IRS account and check with them directly.
Yes, there is a possible sentence of up to five years of imprisonment. But to get this harsh punishment, the IRS takes intent into account. If you forget to file, file late, or don’t have the money to pay, you are not likely to see prison time. But if you are purposely trying to defraud the government, that’s another story.
No, the only way to file 2016 taxes at this point is to prepare physical copies and mail them to the IRS.
Yes, you can pay the IRS using installments as long as they agree.
The first way the IRS will contact you is by mail. Depending on the situation, usually for criminal investigations involving fraud, they may call or visit. When dealing with an IRS agent, you must always ask for credentials and never give information over the phone unless you’ve verified who you’re talking to. The IRS will never send a text or social media message.