Real Estate

What Are Back Taxes? How to File and Its Implications

What Are Back Taxes? How to File and Its Implications

What Are Back Taxes?

Back taxes are taxes that were due but were not paid in full or in part throughout the year. Back taxes can be owed at the federal, state, and/or local levels by taxpayers, accruing interest and penalties for unpaid taxes, which rise over time.

Taxes due from a previous year are referred to as back taxes and could be amassed due to deliberate or inadvertent circumstances, a late payment on taxes. Also, filing a return but not paying the tax burden; failing to disclose all income generated during the tax year, and forgetting to file a tax return are a few more causes. The failure to file a penalty is 0.5 percent of the amount owed if the taxpayer does not file a tax return.

Till the tax is fully paid or until the charge reaches 25% of the tax outstanding, that penalty will be applied every month or portion of a month. With the IRS increasing its interest rate every three months and adding interest to the outstanding balance, the interest rates are now at 3% as of the third quarter of 2020. Because penalties and interest add to the overall tax obligation each month, it can quickly snowball into a large sum.

Numerous taxpayers who may not have the financial wherewithal to pay their overdue taxes face a major problem. Depending on the context, the government may pursue legal action, compel prompt payment, or offer a voluntary disclosure scheme that helps prevent criminal prosecution while allowing several payment options. Tax evasion is a serious offense.

What Are the Implications of Back Taxes?

The IRS may confiscate property, assets, or lay liens on them in some circumstances or establish a federal tax lien on a taxpayer’s property assets to notify other creditors of the taxing authority’s legal entitlement to those assets and property.

The IRS can also confiscate a taxpayer’s salary and levy their bank accounts, freezing the equivalent of the tax outstanding. The tax authority could also utilize a tax levy to lawfully confiscate the taxpayer’s assets like bank accounts, investment accounts, automobiles, and real estate and recover the amount owed. When a tax obligation is not paid, a lien secures the interest of the state or claims in an individual’s or business’ property; however, a levy allows the government to take and sell the property to settle the back taxes.

A few years back, the Internal Revenue Service (IRS) delegated the collection of outstanding back taxes to a commercial collection firm. Taxpayers who do not have the financial means to pay their taxes can often bargain a lower payout with the IRS by directly submitting an Offer in Compromise or through a tax attorney,

Placing Liens on your Property

A tax lien is a legal entitlement against the assets of a non-compliant taxpayer by a government organization. Tax liens are the last recourse for forcing someone or a company to pay unpaid taxes.

If a homeowner does not pay his or her property taxes or owes money to the government, the government can impose a tax lien on that property. Simply put, the federal and state governments can issue tax liens for unpaid income taxes, while local governments can issue tax liens for outstanding property taxes or local income taxes.

The fact that the property is encumbered by a lien does not imply that it will be liquidated. Rather, it assures that the tax authorities have priority over other debt holders contending for the property of the individual or firm.

Furthermore, a tax lien restricts the taxpayer from disposing or remortgaging the assets that are subject to the lien. Until the tax debt is paid up or the statute of limitations on the debt ends, the lien will remain in place.

If the taxes are not paid, the tax authority can utilize a tax levy to lawfully seize the taxpayer’s assets such as bank accounts, investment accounts, autos, and real estate to recover the money owed. When a tax debt is not paid, a lien protects the government’s interest in an individual’s or business’ property, whereas a levy allows the government to intervene and sell the property to satisfy the debt.

How to File for Back Taxes

If you are behind on your tax payment, you must file a past-due tax return with the IRS and the procedure is similar to filing a timely tax return, with a few exceptions.

To begin, gather your tax paperwork and other financial records, this is because the same information is needed for a past-due tax return as it is for a regular return. You’ll also want to acquire any receipts you’ll need to claim tax credits or deductions.

The IRS can provide you with a tax return transcript if you don’t have all of your paperwork or aren’t sure whether you do and they can be delivered electronically or by mail. In most cases, transcripts are only available for the current tax year and the previous three.

Nonetheless, you cannot electronically file a past-due return, unlike a normal tax return. And if you got a late notice from the IRS, you must send your late return and payment to the postal address stated on your Form 1040 or the late notice.

Also, incorporate unpaid taxes from previous tax years in your payment and make sure all your outstanding are paid in full, else it keeps accumulating interest.

The Author

Ajisebutu Doyinsola

Doyinsola Ajisebutu is a journalist and prolific writer who takes a special interest in Finance, Insurance, and the Tech world.