If you owe back taxes to the IRS, your two most crucial steps are to always file your current year’s return on time and never ignore official IRS notices. The five most costly mistakes people make are not filing, neglecting an extension, ignoring letters, avoiding payment plans, and downplaying the serious consequences of inaction.
Almost 10 million Americans owe the IRS a significant amount in back taxes. If you are one of them, you may be anxious or unsure of your next move. Missteps in dealing with back taxes can quickly make a bad financial situation much worse. Below, we’ve outlined common mistakes and explained why these ineffective strategies will only increase your debt and penalties.
1. Deciding Not to File This Year’s Taxes
Just because you owe money from a previous tax year, you should never avoid filing your current tax return. Failing to file won’t stop the debt process; it will only trigger a massive penalty that is far heavier than the penalty for not paying.
When you fail to file your taxes, you face a “failure to file” penalty of 5% of the taxes owed for every month you are late, up to a maximum of 25%.
Compare this to the “failure to pay” penalty, which is only 0.5% per month.
Key Takeaway: If you owe $5,000, the failure-to-pay penalty is only $25/month, while the failure-to-file penalty is a devastating $250/month. Always file on time, even if you can’t afford to pay what you owe.
2. Neglecting to File a Tax Extension
If you need more time to prepare your return, file for an extension immediately. The IRS will grant you up to a six-month extension to file your tax documents.
Filing for an extension is a simple step that helps you avoid the severe “failure to file” penalty. Tax extension requests must be filed by the general tax deadline (typically April 15th).
Crucial Clarification: An extension to file is not an extension to pay. Your estimated tax payment is still due by the original deadline. You will incur the 0.5% failure-to-pay penalty on any unpaid amount starting after the original deadline, but you will successfully avoid the much larger 5% failure-to-file penalty.
3. Ignoring Letters and Notices You Receive
When you owe the government money, the IRS is diligent and sends a series of formal notices, including 30-day and 60-day deadlines. Do not ignore these letters.
Failing to open and respond to an official IRS notice puts you at a significant disadvantage when managing your back tax situation. Ignoring them is the only way to lead to the most severe consequences.
Many of these notices are automated. If a notice seems confusing or contradicts what you’ve heard during a phone call, don’t be alarmed; the discrepancy can usually be cleared up, but you must act on the notice.
If you need help making sense of the legal jargon and deadlines, contact a tax relief professional.
4. Avoiding the Payment Plan Options
When you contact the IRS in response to a notice, you should always discuss payment plan options. In most cases, the IRS prefers to work out a solution and will offer to let you pay the back taxes, interest, and penalties on a monthly basis. You can often arrange installments that fit your budget.
Tax law is complicated, and navigating the system can be intimidating. The IRS has formal programs designed to help, such as:
- Short-Term Payment Plans (up to 180 days)
- Installment Agreements
- Offer in Compromise (OIC)
A tax relief professional understands the nuances of tax law and can help you select and negotiate the best option to pay down and settle your tax debt, ensuring you maximize your rights.
5. Downplaying the Consequences of Inaction
It is completely understandable to feel safer ignoring a tax debt, but the **consequences of inaction are always greater.**
When you owe back taxes and fail to negotiate a resolution, you can face:
- Growing Penalties and Interest
- Federal Tax Liens (attached to property, harming credit)
- Wage and Bank Levies (seizure of money)
- Credit Damage
The IRS has powerful collection tools. Taking steps to remedy your situation is the only way to protect your assets and regain peace of mind.
Summary: Your Immediate Action Plan
More people trust us with their IRS tax debt, and for good reason. No matter your unique situation, a tax relief professional can give you a clear, achievable plan to get your financial life back on track.
We can stop collections so you don’t have to worry about the flow of notices, the threat of liens, levies, and more. Learn more about the tax relief services we provide or click here and we’ll call you to discuss your options.
Owing back taxes can feel like a financial crisis. With our help, you can get back on track.