No one intends to be years behind on taxes, but it can happen to any small business owner. The good news is that you’re not alone. Even some of the most experienced entrepreneurs have found themselves in this situation at one time or another.
There’s technically no limit to the number of years for which you can file back taxes. However, there are stipulations, regulations, and processes in place that tend to prevent most taxpayers from getting more than a few years behind without being well aware that they owe the IRS money.
When you do get behind on your taxes, you can minimize the damage by taking steps to file your back tax returns as soon as possible. The sooner you file your late tax returns, the sooner you can put this stressful situation behind you—and put an end to the accrual of fees and penalties. Remember that the penalties, interest, and actions taken by the IRS to recover what you owe will only increase as time passes.
This guide will cover your options for catching up on your unpaid taxes, including time limitations, how to file your back taxes, and the IRS’s response if you don’t settle your outstanding tax liabilities.
What are back taxes?
Back taxes are simply 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, not making enough in estimated tax payments, or financial hardship. Regardless of the cause, missing your filing due date will result in the IRS tacking on interest and penalties, increasing your tax liability.
How many years can you file back taxes?
IRS Policy Statement 5-133, Delinquent Returns-Enforcement of Filing Requirements, 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 longer 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, you only have 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.
How do you find out how much 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 transcriptby 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.
Why you should file
If you don’t file your back taxes, the IRS has authorization through Sec. 6020 to prepare a substitute return on your behalf. They will notify you first of their intent to do so, and give you an opportunity to respond. If you do not file your tax return on your own by their deadline, then they will complete the return for you.
This may sound like an easy resolution—but actually, allowing them to complete the substitute return on your behalf can substantially increase your tax obligation.
This is because the IRS bases your substitute return strictly on your business income. It omits exemptions, deductions, and tax credits that could substantially reduce your tax obligation.
For example, an IRS substitute return won’t include itemized deductions such as insurance, casualty and theft losses, advertising costs, office supplies, bank fees, business vehicle expenses, legal fees, and other allowable business deductions. The IRS’s return also omits cost-saving tax credits your small business may be eligible for.
You have 30 days after receipt of the letter to send in a completed return. Your other options are to send in IRS Form 870-Consent to Assessment and Collection form or a statement explaining why you aren’t required to file a return.
Where do you start?
Once you’re ready to catch up on your back taxes, here are some suggestions to get you started.
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 it’s important to remember that they want to work with 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 liensand 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.
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, so if it’s more than you can handle on your own consider hiring a professional or outsourcing the work to a service like Bench Retro.
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.
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.
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.
What happens if you don’t file your back taxes?
Ignoring the IRS’s communications is the worst thing you can do, and it won’t stop them from pursuing your tax debt. While agents won’t show up on your doorstep, they will penalize you by adding costly fines to your tax debt. Here is the sequence of eventsyou can expect if the IRS doesn’t receive your payment.
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.
If you don’t follow up on the first letter, the IRS makes good on its promise of applying interest and penalties to your back tax balance. A Failure to Pay Penalty of 0.5% of the total amount of taxes owed is applied each month to the unpaid balance. This penalty will never exceed 25% of the balance. A 4.5% Failure to File Penalty is also added if you haven’t filed a return.
In addition to the Failure to Pay and Failure to File penalties, the IRS charges interest that compounds daily on your back taxes with the penalties.
- The IRS becomes more aggressive in their collection efforts if you still haven’t paid towards 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.
What if you can’t afford to pay your back taxes?
One reason many business owners get behind in their taxes is an inability to afford them. Remember that even if you can’t pay in full, you can still make partial payments that will decrease your overall debt from penalties and interest.
The IRS has a few options to help you in this situation. The most common solution is an installment agreement with affordable payments. Another is proving financial hardship so that the IRS can agree to a settlement that they can reasonably expect you to pay. Penalty abatement, in which the IRS minimizes the penalties on your back tax debt is another option. However, this type of relief requires proving reasonable cause, such as a natural disaster or a death in the family.
How Bench can help
If you’re overwhelmed by the thought of catching up on years of back taxes, Bench is here to help. We’ll get your taxes in order, even if you’re behind on your bookkeeping. Bench Retro’s tax professionals can complete your past bookkeeping fast, so you don’t miss out on credits or deductions that will lower your back tax obligations. With our knowledgeable and professional bookkeepers on the job, you’ll have more time to focus on the day-to-day aspects of your business.
The bottom line
If you’re behind on your taxes, it’s never too late to work with the IRS to clear your record. The IRS will accept up to six years of returns, so there’s no need to panic if you find yourself in this situation. The IRS also has several options to help you catch up on your back taxes if you cannot afford them. In any case, it’s always best to address your back tax situation as soon as possible, so you can focus on looking ahead and growing your business.