How Much Does It Cost to File Back Taxes?

Filing back taxes can be costly, especially when penalties and interest accumulate. Whether you missed a deadline due to financial hardship or oversight, the longer you wait, the more expensive it becomes. The total cost depends on IRS penalties, interest, professional preparation fees, and potential inaccuracies in your return.

Late Filing and Payment Penalties

Failing to submit a tax return on time results in two separate penalties: one for late filing and another for late payment. The failure-to-file penalty is 5% of the unpaid tax per month, capped at 25%. If a return is over 60 days late, the minimum penalty is $485 or 100% of the unpaid tax, whichever is lower.

The failure-to-pay penalty starts at 0.5% of the unpaid tax per month, also capped at 25%. If both penalties apply in the same month, the failure-to-file penalty is reduced to 4.5%, making the combined total 5%. If the IRS issues a final notice of intent to levy and the balance remains unpaid for 10 days, the failure-to-pay penalty increases to 1% per month.

Taxpayers with a valid reason for missing the deadline can request penalty abatement. The IRS considers circumstances like serious illness, natural disasters, or reliance on incorrect professional advice. First-time penalty abatement is also available for those with a clean compliance history for the past three years.

Interest Charges

The IRS charges interest on unpaid taxes, which compounds daily until the balance is paid. The rate, determined quarterly, is the federal short-term rate plus 3%. As of 2024, this rate is 8% annually.

For example, if a taxpayer owes $10,000, an 8% annual interest rate results in approximately $800 in interest for the first year. Because interest compounds daily, the actual amount owed will be slightly higher. Over multiple years, this can significantly increase the total debt.

Unlike penalties, interest is rarely reduced or removed. Even if a taxpayer qualifies for penalty abatement, interest on the underlying tax liability remains. The only way to stop interest from accruing is to pay the full balance or set up an installment agreement, which slightly reduces the rate.

Fees for Professional Preparation

Hiring a tax professional to file back taxes can be expensive, with costs depending on the complexity of the return and the number of years being filed. A basic return with a single W-2 may cost $250 to $500, while more complicated filings, such as those involving self-employment income, multiple deductions, or foreign assets, can exceed $1,500 per year.

Certified public accountants (CPAs) and enrolled agents (EAs) typically charge $150 to $400 per hour. Tax attorneys, often necessary for legal concerns like audits or potential criminal tax issues, can charge $500 or more per hour. Some professionals offer flat fees for straightforward cases, but hourly billing is common for extensive work, such as reconstructing financial records or negotiating with the IRS.

If financial records are missing, preparers may need to request tax transcripts from the IRS or reconstruct income and expenses from bank statements, increasing costs. Business owners and individuals with rental properties often face higher fees due to additional reporting requirements.

Payment Arrangement Fees

For those unable to pay their tax debt in full, the IRS offers installment agreements, but these come with additional costs. Setting up a long-term payment plan (more than 120 days) costs $31 if payments are made via direct debit. If using non-automated payment methods, the fee increases to $130. Low-income taxpayers may qualify for a reduced fee of $43.

A short-term payment plan (120 days or less) does not have a setup fee, but penalties and interest continue to accrue. If a taxpayer defaults on an agreement, the IRS may impose reinstatement fees. Businesses, particularly those with payroll tax liabilities, face higher setup costs, with non-direct debit arrangements reaching $225.

Additional Charges for Inaccurate Returns

Filing back taxes with errors or omissions can lead to additional penalties. The IRS imposes accuracy-related penalties based on the nature and severity of the mistake.

The most common is the substantial understatement penalty, which applies when the reported tax liability is understated by more than 10% of the correct amount or $5,000, whichever is greater. This penalty is 20% of the underpaid tax. For example, if a taxpayer underreports income and owes an additional $10,000 after correction, the penalty would be $2,000.

If the understatement results from negligence—such as failing to keep proper records or disregarding tax rules—the same 20% penalty applies. More severe cases involving fraud can lead to a civil fraud penalty of 75% of the unpaid tax.

Errors related to omitted income, excessive deductions, or misclassified expenses can also trigger audits, leading to further costs. If the IRS conducts an audit and finds discrepancies, additional taxes, penalties, and interest will be assessed. Taxpayers who repeatedly file inaccurate returns may face increased scrutiny in future years. Those who receive an IRS notice regarding inaccuracies should respond promptly to minimize further penalties and avoid potential legal consequences.

Determining Total Amount Owed

Calculating the total cost of filing back taxes requires adding up all applicable penalties, interest, and fees. The final amount owed depends on how long the taxes have been overdue, whether penalties apply, and if professional assistance is needed.

To estimate the total liability, taxpayers should start with the original tax amount and factor in late filing and payment penalties. Interest must then be calculated based on the IRS’s current rate, compounding daily. If an installment agreement is necessary, setup fees should also be included. Those using professional tax services should account for preparation costs, which vary based on complexity. If inaccuracies exist, potential penalties for underreporting or negligence must be considered.