What to do if you owe back taxes

January 6, 2022 By: Cox Search

Rarely do people enjoy paying taxes, but it is an aspect of society that everyone must deal with. Taxes also can be quite complex to do correctly, so people often find themselves inadvertently owing the Internal Revenue Service (IRS) back taxes.

According to IRS statistics, more than $114 billion is owed in back taxes, interest, and penalties on those taxes. And while the government has jailed people for tax fraud or tax evasion, most innocent cases of falling behind on taxes won’t lead to prosecution.

But that doesn’t mean you’re off the hook. Use this guide to find out what to do if you owe back taxes to your state or the federal government.

Why do I owe taxes this year?

If you are used to getting a tax refund, it may be a surprise to discover that you owe taxes this year. However, there are many factors that go into the final tax decision. The COVID-19 pandemic has shifted the economy to such a degree that many people’s economic status has changed over the past two years. Side hustles, student loans, or unemployment benefits could all make a major difference.

Other factors that may lead to having to pay taxes this year include any change in life status, from marriage/divorce to the birth of children; a shift in the number of your dependents; or job changes.

What happens if you don’t pay taxes?

Experts all agree – no matter your financial situation, you should always file your taxes, even if you don’t have the money to pay what you owe. The IRS will not forget that you haven’t paid your taxes. If you don’t file, you’ll be subject to a failure to file a penalty, which is equal to 5% of your unpaid balance per month, up to a maximum of 25% of the unpaid tax.

How much do I owe the IRS in back taxes?

There are online tools you can use to determine your balance with the IRS. Access your federal tax account to see the amount you owe and details from your balance. If you receive a collection notice from the IRS, respond immediately.

What are federal estimated tax payments?

If you receive money outside of a salaried job, either through working as an independent contractor, interest, alimony, capital gains, or lottery winnings, you may have to make estimated tax payments. To figure out estimated tax, you must compile your adjusted gross income, taxable income, taxes, credits, and deductions for the year. You can pay estimated taxes online. People who pay estimated taxes make quarterly payments.

What are my options to pay back taxes?

There are several steps you can take if you want to figure out how to pay taxes and not go into further financial arrears.

1. Contact the IRS: If you owe back taxes, reach out to the IRS and explain the situation. You can then set up a payment plan to cover your debt. There are two payment plan options. A short-term payment plan will give you 120 days to pay the back tax amount and interest. You can pay taxes a with credit card or have the IRS withdraw funds from your checking or savings account. A long-term payment plan costs money to apply for, though low-income individuals can attempt to get the fees waived.
2. Offer in compromise: This option gives you the chance to make one lump sum payment that is less than the total owed to clear the debt. You will have to apply for this option and the IRS can reject the application.
3. Ask for help: Some communities offer low-income taxpayer clinics. These clinics help those with financial hardships by representing them in cases with the IRS. In 2019, tax clinics helped decrease $50 million in tax liabilities.
4. Get a personal loan: If your tax debt is manageable and you don’t want to set up a payment plan, a personal loan is a quick and easy way to get the funds to clear the issue. Personal loans are ideal for unexpected financial situations. Check with your community-focused institution to find out what you need to qualify for a personal loan.

What about state taxes?

Your state tax bill may also reflect back taxes. In Oklahoma, the state will send a bill that reflects the amount an individual owes. You can pay state taxes online or apply for a payment plan to offer some relief.

Back taxes can be a stressful situation for anyone. If you’ve fallen behind on paying your taxes, be proactive. Working with the IRS or receiving a personal loan to help alleviate the debt can be a step in the right direction.