When you get behind on your taxes, you can minimize the damage by taking steps to file your late tax returns as soon as possible. The sooner you file your back tax returns, the sooner you can put this stressful situation behind you—and put an end to the accrual of fees and penalties.
Highlights and Takeaways
- Back taxes are taxes owed from prior years that you have not paid by the due date.
- Having the last six years of your taxes filed typically means you are in good standing with the IRS.
- Ignoring your back taxes will result in serious penalties and increased amounts owed. Taking the steps to file your back taxes can help reduce punishments.
- There are several manageable ways available to help you pay off your back taxes.
This guide covers how to file your back taxes, including how many years you can file back taxes for, what happens if you don’t settle your outstanding tax liabilities, and options for paying back your overdue taxes.
What are back taxes?
Back taxes are the amount of money you owe the IRS that you didn’t pay by the filing due date.
Perhaps it was caused by an oversight or financial hardship. Regardless of the cause, missing your filing due date will result in the IRS adding interest and penalties to your owed tax amount, increasing your tax liability.
How to file back taxes
Once you’re ready to get caught up on your back taxes, here are some suggestions to get started.
1. Contact the IRS as soon as possible
One of the most important first steps in filing your late income tax returns is contacting the IRS. Many people are intimidated by the thought of dealing with the IRS but they want to hear from you to get your tax debt handled. The sooner you contact them, the sooner you can start working on a plan to pay off your back taxes.
While it may be tempting, ignoring the IRS is never a good idea. The longer you fail to communicate with them, the greater the likelihood they will impose more aggressive actions, such as tax liens and levies.
So when you do receive communications from the IRS, respond as soon as possible and inform them of your intent to catch up on your past-due returns. This keeps the lines of communication open, which may result in fewer payment penalties. Complete any required forms and furnish documentation as requested.
2. Get your records and bookkeeping in order
Having a handle on your bookkeeping is vital for any business, but it’s especially crucial if you’re behind on your taxes. If you aren’t current with your bookkeeping, now is the time to tackle that backlog. Up-to-date books are essential to filing accurate back taxes and avoiding underpayments that will result in penalties and interest charges.Catching up on years of bookkeeping can be daunting on your own while also running your business day-to-day. Consider hiring a professional or outsourcing the work to a service like Bench.
3. Hire a tax professional
Depending on the amount you owe and the complexity of your returns, it may be in your best interest to recruit a CPA or tax advisor for assistance.Make sure that the CPA you hire has the knowledge and experience needed to deal with back tax situations. You’ll need to give your tax professional access to all of your tax documents, including notices and letters from the IRS, tax forms, records, receipts, business income and expenses, and the last tax return you filed.
4. File even if you can’t pay
Even if you can’t pay the taxes owed, filing your returns and working out a payment plan with the IRS is better than waiting and accruing failure-to-file fees. The sooner you file, the less you’ll owe in the long run.
5. Start payments as soon as possible
If you owe money to the IRS, paying them as soon as possible is essential. Not only will this help to minimize late fees and penalties, but it will also put you in a better position to negotiate a payment plan or offer in compromise. Once you have filed your back taxes, don’t expect an immediate acknowledgment from the IRS. It may take several months to a year before your returns are processed. The good news is that this delay buys you some time to strategize your payment plan.
Further reading: How the IRS Tax Payment Plan Works (And What You Need to Apply)
How many years can you file back taxes?
Section 4.12.1.3 of the IRS manual states that you must file returns for the last six years to be in good standing.
There may be instances where the IRS requires tax filings past six years—in other words, they’ll want you to go back further and provide your income, expenses, and other tax filing information from more than six years ago. The most common reasons for this request are the following:
- The taxpayer has a history of noncompliance.
- A return older than six years has a substantial tax liability.
- A business is involved, and the IRS intends to more closely scrutinize the returns for potential noncompliance.
- There is an investigation into possible illegal sources of income.
- Local revenue officers require additional forms as part of another in-depth investigation.
If you’re filing to receive a tax refund owed to you, you must file that return within three years from the original deadline to receive it, unless the following apply:
- You’re claiming a refund due to deductions for bad debt or worthless securities. In this case, you have up to seven years to claim the refund.
- You have physical or mental disabilities preventing you from managing your own financial affairs.
Even though the IRS can request your tax filings for the past six years, they can’t collect taxes owed after ten years due to a statute of limitations. However, note that they may aggressively attempt to pursue payment as this 10-year deadline draws nearer.
In some cases, the IRS may temporarily suspend the collection period. The most likely scenarios for this include:
- If you’re in the process of filing for bankruptcy, the court issues an automatic stay preventing the IRS from taking collection actions against you. This stay lasts for the period of the bankruptcy case plus six months.
- The IRS is working with you to reach an installment agreement, offer in compromise, or other relief options.
What happens if you don’t file your back taxes?
Ignoring the IRS’s communications won’t stop them from pursuing your tax debt. Here is the sequence of events you can expect if the IRS doesn’t receive your back tax payment.
You’ll hear from them with a reminder letter
The IRS sends a notice stating you haven’t filed and paid taxes by the deadline. This notice will include the amount you owe, including penalties and interest. Information on how to pay your outstanding balance is also provided.
Penalties begin to apply
If you don’t follow up on the first letter, the IRS applies the following penalties to your back tax balance:
- A “Failure to Pay Penalty” of 0.5% of the total amount of taxes owed. This penalty is applied each month to the unpaid balance, but will max out at 25% of the unpaid taxes.
- A “Failure to File Penalty” of 5% of the unpaid taxes for each month your return is late, also maxing out at 25% of your unpaid taxes.
Interest starts accruing
The IRS doesn’t stop at applying penalties. You will also pay accrued interest on the amount you owe with the penalties included. Interest starts to apply as soon as you miss your income tax return due date.
The IRS may apply tax levies against your assets
The IRS becomes more aggressive in their collection efforts if you still haven’t paid your back taxes despite their letters. You may receive a notice of their intent to put a tax levy on your assets, including your bank accounts. They can also garnish your wages or place a federal tax lien on your property.
The IRS will file a substitute return for you
Two to three years from the date your original return was due, the IRS may file a return on your behalf under their Substitute for Return Program. They will notify you first of their intent to do so with a series of letters, and give you an opportunity to respond.
This may sound like an easy resolution—but in fact, allowing the IRS to complete the substitute return on your behalf can substantially increase your tax obligation.
The IRS won’t necessarily have your best interests in mind when filing your substitute return. They won’t look for any applicable tax credits, deductions, exemptions, or write-offs, which can substantially lower your tax debt.
Further reading: What Happens If You Don’t File Taxes for Your Business
How do you find out how much back taxes you owe?
If you’re unsure how much you owe in back taxes, there are a few ways you can find out:
- Access your online tax account at IRS.gov/account to view the amount owed and the last five years of your payment history.
- View email notifications in your account regarding your back taxes.
- Obtain your income transcript by mail by filing Form 4506-T.
- Call 800-829-4933 from 7 a.m to 7 p.m. local time to speak to an agent regarding your business back taxes.
- Obtain the amount from letters the IRS sends you regarding your tax bill and payment status.
What if you can’t afford to pay your back taxes?
One reason many business owners get behind on their taxes is an inability to afford them. Even if you can’t pay in full, making partial payments decreases your overall debt owed and reduces the penalties and interest.
The IRS has a few options to help you in this situation. Here are the payment options available to you for back tax relief.
7 options for paying your back taxes
1. Take out a personal or business loan
Depending on the outstanding tax debt amount and loan interest rate, taking out a personal or small business loan can be a feasible option. If you are approved for the loan, you will have the same monthly installment and interest rate for the life of the loan. A loan can cost you considerably less to pay off than the IRS’s added application fees, penalties, and accrued interest.
2. Pay the tax debt with a credit card
This is an effective solution as long as you use a card with 0% APR, which many credit companies offer new cardholders. This method enables you to pay off the full amount you owe, interest-free. The catch? You’ll need to pay the amount off before the introductory period expires, or you will incur high monthly interest charges.
Looking for a new business credit card? Check out our list of the Top 16 Small Business Credit Cards.
3. Ask for a short-term extension
This is probably the easiest, most straightforward way to buy some time with the IRS.
By completing a simple online payment agreement application, you buy another 180 days to pay your taxes. You may pay your owed taxes at anytime within this 180 day window. Individuals are eligible for this short term payment plan if you owe less than $100,000 in combined tax, penalties and interest and have filed all past due returns.
4. Agree to an installment plan
The IRS offers a long term installment plan to help you pay off your taxes through monthly payments.
The program is available to individuals owing $50,000 or less in combined tax, penalties and interest, and businesses with less than $25,000 in combined liability. To qualify for this program you must have filed all prior year returns.
5. Make a deal with an Offer in Compromise (OIC)
An Offer in Compromise (OIC) gives taxpayers a chance to cut a deal with the IRS and pay less than they owe. This option isn’t open to just anyone, though.
To be approved for an OIC, the IRS must have doubt they can collect the full tax bill amount from you in the foreseeable future. An alternative condition is if the full payment of your back tax bill causes you economic hardship.
An OIC is a formal process that we’ve outlined in our Offer in Compromise guide.
The IRS must give you a written explanation if your offer is not accepted. Usually, it’s because the offer was too low. If so, the IRS will state an acceptable amount for the OIC.
6. Request a “Currently Not Collectible” status
You can request a “Currently Not Collectible” status be placed on your account if you are unable to pay your back taxes and living expenses. The IRS may request that you prove your financial situation with extensive documentation, including bank records, vehicle registrations, and other items that prove your inability to pay your full back tax amount.
Unlike the OIC, this is a temporary status. The IRS may do an annual review of your financial status to see if your situation has improved enough to collect the tax debt.
7. Work with a qualified tax resolution specialist
If you find the idea of dealing with the IRS on your own a bit too overwhelming, you can recruit a qualified tax resolution service to assist you. These services negotiate payment terms with the IRS on your behalf.
When searching for this assistance, be wary of tax resolution firms that may employ unlicensed or inexperienced personnel that promise you the results you want to hear in unrealistic timelines.
Another option is to consult with a tax professional who is authorized to represent clients before the IRS. An Enrolled Agent, for example, is a tax practitioner who either has passed an exam that covers all aspects of tax representation and business tax laws or has worked for the IRS for five or more years.
How Bench can help
If you’re overwhelmed by the thought of catching up on years of back taxes for your small business, Bench is here to help. We’ve supported thousands of small business owners through their tax resolution journey. With Bench, you can rest assured you are in good hands. Learn more or book a call to talk to a back taxes expert for free.
The bottom line
Unexpected life events can interfere with your ability to oversee your business, including filing your taxes on time. While facing your back tax obligation can be challenging, taking action sooner than later will head off additional penalties and accrued interest.
There are several manageable ways available to help you pay off your back taxes. The IRS can work with you to establish an installment payment plan or even lower your debt, making repayment more affordable without severely impacting your quality of life.
Moving forward, start setting aside money for your small business taxes to avoid falling behind. If you need help getting started, use our free quarterly tax calculator to determine what your estimated taxes will be.
In addition to federal taxes, however, you should also plan to pay state and local taxes. You can learn more about these taxes by visiting your state’s taxing authority.
