What Does Taxes Paid in Arrears Mean?
Understand what "taxes paid in arrears" means, why these overdue financial obligations occur, and how to address them effectively.
“Taxes paid in arrears” describes a situation where a tax obligation has not been met by its original due date. This indicates an overdue payment, meaning the taxpayer is behind on their required contributions to a taxing authority. Understanding this concept is important for individuals and businesses to manage their financial responsibilities and avoid complications. The term refers to a past-due status, not an upcoming future payment obligation.
Understanding Taxes “In Arrears”
The phrase “in arrears” signifies that a payment is overdue, meaning a tax liability was not paid by its official deadline. This status applies to various forms of taxation, highlighting a failure to remit funds when legally required. For example, property taxes are often paid for a period that has already elapsed, or they become in arrears if an installment is missed. Many jurisdictions have semi-annual or quarterly payment schedules for property taxes, and failing to meet these dates renders the payment in arrears.
Similarly, payroll taxes, which employers collect and remit for employees’ wages, can fall into arrears if not paid by their specific due dates. These typically involve quarterly filings and payments for federal income tax withholding, Social Security, Medicare, and federal unemployment taxes. If an employer misses deposit schedules for these taxes, the amounts become overdue.
Income taxes can also be in arrears if annual tax liabilities are not paid by the April 15 deadline, or if estimated tax payments, due quarterly throughout the year, are insufficient or missed. The Internal Revenue Code outlines the requirements for these payments, emphasizing the pay-as-you-go nature of the tax system.
Situations Leading to Taxes in Arrears
Several common scenarios can result in taxes falling into an “in arrears” status. The most straightforward is missing an official payment deadline for annual, quarterly, or installment tax obligations. For instance, if the April 15 deadline for filing and paying individual income taxes passes without payment, the tax owed immediately becomes in arrears. This applies even if an extension to file a tax return is granted, as an extension to file does not extend the time to pay the tax due.
Another frequent cause is the underpayment of estimated taxes throughout the year. Many individuals with income not subject to withholding, such as self-employed individuals or those with significant investment income, are required to make quarterly estimated tax payments. If these payments are insufficient to cover at least 90% of the current year’s tax liability or 100% of the prior year’s tax liability, the underpaid amount becomes in arrears.
A tax authority audit can also lead to a determination that more tax was owed for a previous period than initially reported, resulting in an assessed deficiency that becomes in arrears if not paid promptly. Discovery of previously unreported income or assets from a prior period can also trigger an additional tax assessment that, if unpaid, moves into an arrears status.
Addressing Taxes in Arrears
Once taxes are in arrears, additional financial costs are incurred beyond the original tax liability. Taxing authorities impose penalties and charge interest on overdue amounts. The failure-to-pay penalty for federal income taxes is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25%. This penalty can be reduced to 0.25% per month if an approved payment plan is in place. Interest is also charged on unpaid tax from the original due date until the date of full payment, with the rate determined quarterly, often calculated as the federal short-term rate plus three percentage points. For individuals, this underpayment interest rate has been around 7% for the first half of 2025.
To resolve taxes in arrears, the primary method is to make a full payment of the outstanding balance, including any accrued penalties and interest. If immediate full payment is not feasible, taxpayers have options to settle the past-due amount. These include entering into a payment plan, such as an installment agreement with the taxing authority, which allows for regular monthly payments over a set period. An Offer in Compromise (OIC) may also be available, permitting eligible taxpayers to resolve their tax liability with the IRS for a lower amount than what is actually owed, based on their ability to pay, income, expenses, and asset equity.