Behind on Taxes? Here’s What You Need to Do

Falling behind on tax obligations can be a source of worry. However, established procedures and pathways exist to resolve these matters. Taking proactive steps to address unpaid taxes can alleviate stress and prevent further complications. This article guides you through understanding the consequences, initiating the resolution process, exploring payment options, and knowing when to seek professional support.

Understanding the Implications of Unpaid Taxes

Failing to file a required tax return by the due date can result in a failure-to-file penalty. This penalty is typically 5% of the unpaid taxes for each month or part of a month a return is late, up to a maximum of 25% of the unpaid tax. If the return is over 60 days late, the minimum penalty is either $485 or 100% of the tax owed, whichever is smaller.

A failure-to-pay penalty applies when taxes are not paid by the due date. This penalty is generally 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25% of the unpaid tax. Both penalties can accumulate simultaneously, though the combined penalty for any month is capped at 5%.

Interest also accrues on any unpaid tax and penalties from the original due date until payment. The interest rate is determined quarterly and is set at the federal short-term rate plus 3 percentage points.

If taxes remain unpaid, the government may take enforcement actions. A federal tax lien is a legal claim against your property, including real estate, vehicles, and financial assets, which secures the tax debt. A levy is a more direct action, allowing the government to seize property or garnish wages to satisfy the tax liability.

Initial Steps to Resolve Your Tax Situation

The first step when behind on taxes is to file all past due tax returns, even if you cannot pay the tax owed. The penalty for failing to file is generally higher than the penalty for failing to pay, making timely filing a priority. Filing allows the tax authority to assess the exact amount due, including any penalties and interest, providing a clear starting point for resolution.

After filing, gather all necessary documents. This includes W-2 forms from employers, 1099 forms for various income types (such as independent contractor earnings, interest, or dividends), and records of other income or expenses. Bank statements, investment account statements, and copies of previously filed tax returns can also provide valuable information. This comprehensive collection ensures accuracy when preparing overdue returns.

Next, determine the exact amount owed for each missing year. This can be done by preparing returns using tax software, consulting a tax professional, or requesting wage and income transcripts from the tax authority if original documents are missing. These transcripts provide information reported by employers and financial institutions, helping reconstruct your income for past years.

Understanding your current financial situation is fundamental before payment discussions. Create a detailed assessment of your income, monthly expenses, and any assets or liabilities. This overview is crucial for determining your ability to pay and exploring resolution options.

Exploring Options for Payment and Resolution

Once past tax returns are filed and your financial situation is understood, several pathways exist to resolve unpaid tax liabilities.

If feasible, pay the full amount owed immediately. Payments can be made electronically through services like IRS Direct Pay, by debit or credit card through third-party processors, or via the Electronic Federal Tax Payment System (EFTPS).

If immediate full payment is not possible, a short-term payment plan may be an option, allowing up to 180 additional days to pay the tax liability in full. This plan can be requested online, by phone, or in writing. Interest and penalties continue to accrue during this plan.

For those needing more time, an installment agreement allows taxpayers to make monthly payments over a longer period, typically up to 72 months. To qualify, you generally must be current with all filing requirements. An installment agreement can be requested using Form 9465, Installment Agreement Request, or online.

An Offer in Compromise (OIC) allows certain taxpayers to resolve their tax liability for a lower amount than originally owed. This option is considered when there is doubt as to collectibility (doubt you could ever pay the full amount), doubt as to liability (doubt you owe the tax), or when collecting the full amount would cause significant financial hardship. Applying for an OIC involves submitting Form 656, Offer in Compromise, along with Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses, and a non-refundable application fee, which may be waived for low-income individuals.

In cases of severe financial hardship, a taxpayer may be placed in Currently Not Collectible (CNC) status. This means the tax authority has determined you cannot pay your tax debt without significant difficulty meeting basic living expenses. To request CNC status, contact the tax authority directly and provide detailed financial information. While in CNC status, collection efforts are temporarily suspended, but interest and penalties continue to accrue, and the statute of limitations on collection remains in effect.

Penalty abatement is the removal or reduction of penalties due to reasonable cause. Reasonable cause may include events beyond your control, such as a natural disaster, serious illness, or erroneous advice from a tax professional. To request penalty abatement, submit Form 843, Claim for Refund and Request for Abatement. Each request is reviewed on a case-by-case basis.

When to Seek Professional Assistance

Seeking professional assistance is prudent in certain situations. If you have multiple years of unfiled tax returns, significant tax debt, or complex business tax obligations, professional guidance can be beneficial, as navigating the resolution process independently can be challenging. Receiving notices of intent to levy or lien from the tax authority also indicates a need for professional guidance to protect your assets and rights.

Difficulty understanding payment and resolution options, or the application processes, are also strong indicators to seek help. Professionals can explain complex tax laws and guide you through specific forms and requirements. Pursuing an Offer in Compromise or requesting complex penalty abatements often benefits from expert knowledge due to the detailed financial analysis and specific criteria involved.

Several types of tax professionals can assist:
Enrolled Agents (EAs) are federally licensed tax practitioners specializing in taxation and authorized to represent taxpayers before the tax authority.
Certified Public Accountants (CPAs) are licensed accounting professionals who can prepare taxes, provide financial advice, and represent taxpayers.
Tax Attorneys are lawyers specializing in tax law, useful for legal issues, audits, or appeals where legal interpretation or litigation might be necessary.

For individuals with limited financial resources, Low Income Taxpayer Clinics (LITCs) offer valuable support. These independent organizations provide free or low-cost assistance to low-income individuals with a tax dispute or who need help understanding their taxpayer rights and responsibilities. LITCs can represent taxpayers in audits, appeals, and collection disputes, ensuring that even those with financial constraints can access competent tax guidance.