The Ultimate Guide to Dealing with Unpaid Back Taxes

Last updated: Apr 01, 2019

If you owe the IRS unpaid back taxes, there are several options for dealing with it. Read on to find out more.

If you owe back taxes that you aren’t prepared to pay, you’re not alone. Falling behind on taxes happens to the best of us – in fact, millions of Americans owe the IRS. Financial planning is challenging and sometimes you find yourself in debt because of small errors in filing your taxes.

Thankfully, you have options for dealing with the debt and avoiding falling behind in the future.

Here are five tips to help you deal with back taxes now and into the future.

1. Talk to the IRS

Start by talking to a service representative at the IRS personally, or through a tax relief professional. When you find out that you owe the IRS money, it’s easy to quickly sink into denial and avoid doing anything. However, you’ll be racking up interest while you wait to figure out your next move.

Talk to the IRS and find out what options are available in your situation. There are many IRS payment plan programs that allow you to pay back your taxes on time and satisfy the IRS.

If you’re overwhelmed by the amount of the tax debt, there are ways to lower the total amount you owe. The IRS routinely accepts a lower total repayment, but you must negotiate properly.

In a true financial crisis, you could file for bankruptcy, pulling the plug for both of you. If that’s a real possibility, you’ll find the IRS will try to negotiate a compromise rather than lose the debt completely.

The IRS Offer in Compromise plan allows you to pay just a percentage of what you owe. You could pay your debt off for as little as 10-20% of what they’re asking from you. At the least, they’ll put you on an installment plan.

Paying your back taxes in installments is a good option if you cannot afford to pay a lump sum – even a reduced lump sum through the Offer in Compromise program.

2. Figure Out Your Financials

Before you decide what you can afford on an installment plan, you need to look at how much you can currently afford.

If you’re making enough to pay something, you need to figure out exactly how much you can pay back. This is based on your income and your monthly expenses. When you’re paying more than 75% of your income on your expenses, you’re not going to have a lot of extra money for paying off back taxes.

If you truly cannot afford to repay the tax debt, you could apply for IRS “uncollectible” status. If approved, the IRS will put collection activities on hold and you won’t accrue any new penalties.

Not sure what program suits your financial situation? Get a free consultation from one of our tax professionals. You’ll get our best advice with no obligations.

3. Tighten Your Belt

The IRS expects you to live within a very modest budget if you claim you cannot repay your taxes. When you disclose your financial statements to the IRS, they may say your expenses are too high and that you can afford to repay the debt or repay it faster if you reduce spending elsewhere.

That’s why it’s smart to negotiate a repayment plan through a skilled tax relief professional. With help from an expert, you can set up reasonable, affordable monthly payments that don’t require major changes to your lifestyle.

Tightening your belt to repay back taxes can be easier than you think. You may be surprised at how much you can save when you eliminate unnecessary expenses. For example, pack a lunch to work every day or take public transit more often. If you could put $100 a week into your tax bill, you could pay off a large tax bill quickly.

Of course, many Americans are truly unable to make ends meet because of unemployment, poor health or other factors. If you cannot cut costs to pay back your debt, find out whether you are eligible for uncollectible status or another form of relief. We can help make that assessment.

4. Follow the Plan

If you negotiate a repayment plan with the IRS, you need to toe the line carefully. Failing to keep up with a repayment schedule can lead the IRS to terminate the arrangement. You’ll also incur fines, making it even harder to repay your taxes on time.

If you stick to the IRS repayment program, you can get yourself out of tax debt on schedule.

And if you’re doing better financially than expected, most repayment plans allow you to accelerate your payments to get out of debt faster. While some debts can’t be repaid early, back taxes are one debt you’re allowed to repay ahead of schedule until your debt is cleared.

Stick to the plan and pay off your debt as soon as possible to put IRS problems behind you.

5. Do Better Next Time

While hindsight is 20/20, we can all learn from mistakes and misfortune. If you’re dealing with tax debt, make sure you don’t roll that debt into the next year and the year after that.

Mistakes in filing your current year taxes can set you up to owe additional fees when the IRS reviews your return. Deductions that don’t make sense or are improperly categorized result in fines and fees.

If you don’t have an accountant, make sure you get one for next year. Skilled accountants file tax returns for individuals with simple tax statuses quickly and easily. The cost of the service is usually less than what you’d pay in fines, penalties and overpayment when you don’t file with expert help.

You Can Get Freedom from Back Taxes

When you owe back taxes, you can’t feel at ease until the debt is resolved. That’s why it makes sense to negotiate with the IRS ASAP, typically through a payment plan or an Offer in Compromise.

If you can’t repay your debt, it’s still important to deal with the IRS before the problem gets worse. You may be eligible for uncollectible status or another form of relief.

For business owners, follow this guide to ensure you don’t fall behind again.