How to File Back Taxes if You Owe Money

Each year, the IRS processes around 261 million tax returns. From individuals, 90% of these are filed electronically. The IRS expects individuals to file an annual tax return each year.

Yet, many don’t file yearly or even haven’t filed for several years. In fact, in 2020, the IRS estimates it was owed over $114 billion in back taxes, penalties, and interest.

Any number of things can make you fall behind on getting your taxes filed. What matters is to get caught up. Are you wondering how to file back taxes if you’re behind?

Read on to learn more about filing back taxes, how to do it, and what happens if you don’t file them.

What Are Back Taxes?

If you haven’t filed your taxes or you filed but didn’t pay what you owed, you’re probably getting some regular notices from the IRS. The IRS doesn’t communicate via telephone or leave messages for you.

They do communicate via forms in the mail. If you owe back taxes, you’ve probably gotten some of that mail from the IRS.

You could have back taxes in a few different ways. Maybe you’ve filed your taxes and owed money. The IRS expects you to pay right away if you owe.

If you didn’t pay right away, then you have back taxes. Maybe you never actually filed taxes last year or for the last several years. You also have back taxes.

The IRS expects anyone who pays taxes through wages or income to file a tax return to ensure the tax dollars owed to them get paid.

Why You Should File Back Taxes

Once you get behind, it’s easy to want to avoid handling the taxes. It can feel daunting and scary to imagine the consequences of not filing your taxes sooner.

The reality is, though, the longer you wait, the worse it gets. You know the adage that there’s only two sure things in life: death and taxes. The IRS will get their money.

Let’s take a look at some of the reasons to do the right thing and get those taxes paid.

Avoiding Interest and Penalties

One of the biggest reasons to face those back taxes is the interest and penalties that are adding up on what you owe.

If you have filed for an extension, the IRS still expects you to pay an estimate of what you owe. If you don’t, they will begin charging you a late payment fee and accruing interest.

The interest and penalties don’t stop adding up until you address the late taxes.

The IRS is waiving and even refunding penalties if you missed the tax filing date for taxes during the 2019 and 2020 tax years because of Covid.

Get Your IRS Annual Tax Refund

Another reason to get your back taxes filed is to be eligible for any refund you might be due. Roughly 3 out of 4 Americans who file get some form of tax refund.

Only about 21% of Americans end up owing additional tax dollars when they file.

Each year you pay taxes through your wages and income. The reason you get a tax refund is that you’ve paid too much.

The IRS will wait for three years to give you a refund. You don’t want to go beyond that three-year window, or you’ll lose your chances of possible refunds from the IRS.

Protect Your Social Security Benefits

Protecting your Social Security benefits is hugely important if you’re a self-employed taxpayer. When you file your taxes, you claim your income, and it also gets reported to the Social Security Administration.

If you don’t file your self-employed wages, then they also don’t get reported to the Social Security Administration, which means you’re not earning the credits towards Social Security in retirement or even potential SSA disability payments.

Avoid Other Financial Issues

If you plan to make a big financial purchase this year, like buying a house, then you’ll need to have your taxes filed and up-to-date.

When you apply for a loan or mortgage, part of the paperwork you’ll be asked for is your tax filing.

A lender wants to see up-to-date income information, and the way they do that is through tax returns. They also don’t want to lend to someone who is behind in what they owe for taxes as it may impact your ability to afford the loan payments.

How to File Back Taxes

Now that you understand all the important reasons to get those taxes filed, you might be wondering how to fix having back taxes. How do you file back taxes if you owe them?

Let’s work through the steps you should take to get your taxes filed and caught up.

Gather Your Tax Information

The first step in getting your back taxes filed is to get your own paperwork in order. To file taxes, you need your W-2s and any 1099 forms you have from the tax year that you’re filing.

An employer will have already filed these with the IRS, so they know what you should have when you file. If you can’t find one of the forms, you can also request a new copy from the IRS.

Get Tax Forms from the IRS

If you plan to complete the tax filing yourself, you’ll need to get the appropriate forms from the IRS. You can visit the IRS website and the needed form, even from previous years.

Another thing you can request from the IRS is all the information they have on file about your taxes. You would use Form 4506-T to make this request.

This form allows you to ask the IRS for information about your W-2s, 1099s, and 1098s that have been filed. Of course, the IRS won’t have information on deductions or credits. Those you need to know about yourself and have the necessary documentation.

Determine How to File

You will need to decide if you plan to work out and file your taxes yourself or hire a professional to help you.

While maybe you could do it yourself, it might be helpful, especially if you have many years to file, to hire and work with a professional tax person.

The goal would be to save you money on your tax liability. If you need to file several years back, the tax preparer may have better knowledge about deductions you could use from that year.

If you do have several years to file, the IRS also recommends that you file the oldest year first. This will allow you to apply any appropriate credits or carryovers to the most recent years if they’re available.

Be Prepared for Penalties and Fees

One thing you need to know if you owe back taxes is that you’ll need to be prepared for the fees and penalties.

You will pay fees and penalties on the unpaid part of your tax bill. You will pay a failure to file penalty of usually five percent of the tax owed up to 25% of the amount you owe.

The IRS will also add a penalty for failure to pay a penalty if you don’t pay the amount that’s owed when you file. This is one-half of one percent per month for up to 25% of what you owe.

Finally, the IRS will also charge interest which is usually accrued from when you file until the tax liability is paid in full.

These fees and penalties can quickly add up, which is why you don’t want to ignore the back taxes, even if you can’t pay them in full. More on this shortly.

Claim a Refund

One benefit of getting your taxes filed is if you have a refund coming. The IRS may still charge a failure-to-file penalty and subtract that from what you have coming.

Remember, you can get refunds for as far back as three years.

If you’re due a refund, once the IRS processes your filing, they will typically mail a check if the refund is for a year further back than the current tax year.

What Should You Do If You Owe the IRS?

What may have held you up from filing your back taxes is that you owe money, and you don’t have it. Since 2016, the IRS will even use a private debt collector as needed to get their back taxes.

It’s important to remember that, generally speaking, the IRS gets its money. If you owe them money and aren’t sure how you’re going to pay your full balance due, you have options.

It’s never a good idea to ignore the IRS and hope the debt will go away. It’s much wiser to attempt to work with the IRS and find an option to take care of your back taxes.

Let’s take a look at some options.

Request an Extension

If you can’t currently pay your tax bill but expect to be able to pay it within the next 120 days, you can file for an extension.

Generally, the IRS will offer a 120-day extension for an unpaid balance. You will continue to accrue penalties on the unpaid balance.

You shouldn’t file for an extension if you already know that in 120 days, you won’t be able to pay your taxes due.

Installment Agreement

If you don’t think an extension is the right fit, you can apply for an installment agreement. This will allow you to make payments toward your tax debt to the IRS.

They will continue to charge you fees and penalties while you’re making payments. The IRS will also charge a fee for applying.

Again, you shouldn’t make an installment agreement if you know you can’t or won’t make the payments you agree to make.

Hardship Extension

The IRS does offer a few options for taxpayers who know they just can’t pay the bill.  You can apply to be put in a currently not collectible status or for an offer in compromise.

You will need to show the IRS that your current financial situation doesn’t allow you to make payments on an installment agreement. Your income is so low that you can’t afford to make payments.

Get a Personal Loan

While generally, it never makes sense to trade one debt for another. You could get a personal loan to pay off the IRS if you have the option.

This would prevent the fees and penalties from continuing to build over time.

Do your homework, though. Many personal loan companies charge high interest rates that will actually cost you more than if you just continue to work through the tax bill with the IRS.

Borrow From a Retirement Investment

If you have a retirement account like a 401(k), one option might be to borrow the money you owe in taxes from your account. You’re borrowing from yourself and paying your own interest.

Be sure to consult a tax specialist before this option since you don’t want to add to your tax problems.

How Late Can You File Your Taxes?

The IRS will want you to file back taxes for as far back as you owe. However, generally, to get in good standing with the IRS, you only need to file the most recent six years of tax filings.

Remember, the IRS will also want you to file the oldest year first and then work forward through the years you need to file.

How to Get Help from the IRS

Again, if you owe several years in taxes, it might make the most sense to consult with a tax professional. You don’t want to miss out on any deductions that might lower your tax liability.

The IRS also offers many resources to help you. You can use their toll-free number for filing help and call 800-829-1040.

You can also use Form 4506-T to request a tax transcript for the years you need to file.

The IRS also offers some programs to help those who are having a hard time, including the Volunteer Income Tax Assistance (VITA) or the Tax Counseling for the Elderly (TCE) programs.

Get on Track File Your Back Taxes

Now that you understand how to file back taxes, don’t let yourself continue to ignore the problem. It will only mean it’s going to get worse. The IRS will work with you if you need some options on owed back taxes.

If you’re looking for an experienced tax expert that knows how to tackle back taxes, we can help. Contact us today so we can get started helping you.