Owe Back Taxes to the IRS? Here Are 3 Things You Need to Know.

I know the title is a bit click-bait-y but if you are here reading this then it worked. Don’t worry, I am a man of my word and there are indeed 3 things you need to know about back taxes. These 3 things are not going to make your back taxes go away. Nothing will. Instead consider them 3 pieces of very good advice on how to get out of trouble and back on your feet.

First, you must get into current tax compliance!

This may sound backwards but the IRS wants taxpayers to deal with current year taxes before anything else. This means filing your tax returns and then start making estimated tax payments, if you are self-employed. The IRS’ theory is that taxpayers who get current tend to stop accruing additional tax debts. To make this work the IRS ties any deal to pay back taxes to getting current.

Filing taxes is easy to understand but taxpayers get confused about estimated taxes. In a nutshell, if you are not an employee, meaning you don not have income taxes withheld, you are obligated to make quarterly estimated tax payments to the IRS. You can see a sample estimated tax form here: Form 1040-ES. For self-employed taxpayers this is often the hardest thing to do.

Most business owners have little cash to spare to keep the company running and the requirement to make estimates seems like punishment. The IRS is not sympathetic on this point. To it, if you can’t pay your taxes than your business is not viable and you should find other work. The IRS is not flexible on this point. So pay your estimates.

In short, file your taxes on time (and paid in full) and make sure you pay your estimates going forward. If you don’t get current than nothing else I tell you will be of any use. So get on board the compliance train!

Second, you can call the IRS and get some additional time to respond

Taxpayers are often overwhelmed with IRS notices demanding payment. Many take the ostrich approach – which makes things worse. Open your mail! In the notice you will find a phone number to call the IRS. Call the IRS tell the  (hopefully) nice IRS agent you need more time to figure out how to deal with your back taxes. Often times the IRS will give you 30 days or more. In a moment you will see why this is so important.

Once you have the time to gather your bearing and consider your options you need to figure out a plan. If you are not currently compliant, you can figure out what you need to do to work that out. Time is a great friend when dealing with back taxes.

Third, and lastly, you need to have a plan for addressing your back taxes

Getting current with your taxes and asking for more time is great but you need a plan. The IRS is not going to tell you what payment arrangement they are going to consider. You need to figure that out yourself. Now I could spend hours talking about all the things you can do but here are three options most used:

• Currently not collectible (CNC). If you cannot pay your back taxes without suffering a financial hardship, you may qualify for a temporary free on collection actions. If you are a CNC candidate, the IRS will cease all collection actions until your situation improves. The taxes do not go away but the IRS is not trying to collect.
• Offers in Compromise. Offers allow the taxpayer to settle their tax debts for less than the full amount. If you qualify, you could wipe out your back taxes for less than the full amount owed, to include penalties and interest. People love this option but most do not qualify under the rules. Still it is an option.
• Installment agreements. Most taxpayers qualify for an installment agreement where the taxes, interest and penalties are paid over time like you would a car loan or mortgage.

Once you have a plan for resolving your back taxes, you can call the IRS and offer a solution. I will be offering more detail on these and other options to resolve your taxes so don’t worry if you have no idea what to do right now. Your takeaway should be that the IRS is not going to do it for you. You must be proactive in resolving your situation.

If all goes well the IRS will accept it and you can start getting back on track. If it doesn’t than you can look at another option or appeal the IRS’ decision. The key here is to show you are trying to offer a realistic plan for dealing with your unpaid taxes.

I hope you found this helpful. I will be adding more detail on each of these three things over time. If you or someone you know in the Greater Portland, Maine area owes the IRS for back taxes, please feel free to contact me directly at 207-299-0515 or by filling out my contact form.