It’s not exactly uncommon for people to owe back taxes, but if you owe a significant amount to the government, you may not have a straightforward option to relieve or settle this debt. If you owe the IRS, and you’re not sure what to do, there are several steps you should take – both to avoid legal action and secure your own financial future.
Navigating significant tax debt is a challenging endeavor, especially when conventional solutions may not apply to your situation. Understanding the complexities and seeking proactive measures is essential in establishing a path toward financial stability and peace of mind.
Talk to a Lawyer
No matter what, your first step should be talking to a tax lawyer. A tax lawyer is a trained legal professional who thoroughly understands the tax code, tax penalties, and options available to people like you. They can help you better understand the situation you’re in, introduce you to your most viable options, and provide you with recommendations so you stay out of legal trouble and move on with your life as smoothly as possible.
While there are some options you can pursue on your own, even small missteps can have catastrophic consequences. It pays to have an expert in your corner who can represent you and help you resolve this situation as painlessly as possible.
Understand the Consequences
Some people are tempted to ignore their back taxes, hoping the problem will go away, but this is usually a bad idea. Most people who owe back taxes never have to worry about time in prison, but repeated failure to pay back taxes can lead to a prison sentence.
More commonly, people are required to pay fines and fees on top of the tax balance they owe.
The failure to file penalty, for example, is 5 percent of your unpaid balance (per month or part of a month), up to a maximum of 25 percent of your unpaid balance. If this failure is found to be due to fraud, the penalty increases to 15 percent per month.
Similarly, the failure to pay penalty applies to balances you haven’t paid. This starts at 0.5 percent of your balance per month and is also capped at 25 percent.
The longer it takes you to pay off your back taxes, the more you’ll eventually pay. And if you keep failing to pay, despite repeated notices, you could end up in prison. It does not pay to play games with the IRS.
Review Your Options
Work with your tax lawyer to review your available options. In most cases, there are several courses of action you can take with the IRS directly to mitigate your back tax payments:
A Short-Term Extension
If you can’t currently pay off your taxes due, but you will be able to in the near future, you can file for a short-term extension. This is a relatively easy piece of paperwork that can buy you a few additional months so you can get the proceeds together to pay off your balance. It could be exactly what you need if you’re only in a temporarily tough financial situation.
Currently Not Collectible
You may also be able to pursue the “currently not collectible” status with the IRS, proving that there’s no way for you to pay the back taxes currently. This doesn’t eliminate your debt but may pause or mitigate penalties until you can pay off your balance. Do note that in order to pursue this status, you need to demonstrate financial hardship. The IRS will review your income, your assets, your expenses, and other factors to determine whether you’re truly unable to pay off this debt.
Offer in Compromise
You may also be able to secure an offer in compromise. Again, you’ll need to prove some measure of financial hardship here. In this status, you may be able to fully pay off your back taxes for a total amount less than what you were originally asked to pay.
An Installment Agreement
A more viable option for most people is to pursue an installment agreement. In this scenario, you’ll work with the IRS to come up with a reasonable payment plan so you can pay off your debt gradually over the course of many installments.
Alternatively, you can pay off your back taxes with one or more of the following:
- A loan: A personal loan from a bank or a friend could help you secure the funds you need.
- A major asset sale: You may also be in a position to sell a major asset, like a house or a car.
- Borrowing from a retirement account: Withdrawing from a retirement account isn’t a great financial move for your future, but it could help you get out of this present situation.
- A credit card: You could also pay off your tax debt with a credit card, though this presents some challenges of its own.
Back taxes are stressful and financially challenging. But with the help of a good tax lawyer, and a willingness to do whatever is necessary to get back to good financial standing, you can return to your normal life quickly and without too much worry about legal consequences.
Taking Control of Your Back Taxes
Handling significant back taxes can be daunting, but proactive steps can lead to a favorable resolution. Consulting a tax lawyer is paramount to understanding your situation and exploring viable options, such as short-term extensions, “currently not collectible” status, offer in compromise, or installment agreements with the IRS. Additionally, considering avenues like loans, major asset sales, or borrowing from a retirement account can provide the financial means to address your tax debt.
By engaging with the available options and expert guidance, you pave the way to a smoother financial future while averting potential legal repercussions. It’s crucial to address back taxes promptly, ensuring a path to financial stability and peace of mind.
