I Owe Back Taxes but Have Not Heard From the IRS. What Should I Do?
Back taxes — the money you owe but have not paid to the Internal Revenue Service (IRS) — can sit in the back of your mind like an unwelcome guest. Just when you think you’re getting ahead, either with personal finances or your small business, you remember: you have unpaid back taxes and you aren’t sure if you’ll be able to keep your financial momentum if you stretch yourself to pay them off.
In other scenarios, it may seem impossible to pay off back taxes. Maybe you or your business are already stretched thin and the idea of prioritizing payments to the IRS feels like it will never happen.
In either case, if the IRS hasn’t come looking for their money, it can be difficult to find the motivation to pay off back taxes. Many taxpayers ask themselves the question: “I owe the IRS back taxes, but they haven’t reached out to me…now what?”
While it’s tempting to ignore the situation or delay any action, it’s important to face the issue head-on. Let’s take a closer look at how you can take control of your finances and make back taxes a thing of the past.
First — If I Ignore It, Will it Go Away on Its Own?
The sooner you can take steps to give yourself a sense of control, the better. The first step might be simply acknowledging the amount of back taxes you owe. The second step might be seeking the help of a professional, who can help you understand the big picture and lay out your options for you.
Keep in mind, if you delay — allowing that nagging voice, “I owe the IRS back taxes” to get louder — you will only cause yourself more stress. In addition, the longer you take to develop and execute a plan, the more money you will likely owe in the end.
Money matters have a way of occupying space in our minds. If you owe back taxes and are wondering if the IRS is bound to find you, it can cause considerable stress. Not knowing when they’ll target you or your business — or IF they’ll come looking for you at all — can leave you feeling vulnerable.
Things are Changing
The Inflation Reduction Act, which passed into law in August 2022, has made it even more important for you to pay attention to IRS activity. Introduced as an amendment to the Build Back Better Act, the Inflation Reduction Act includes changes to tax-related policies and credits. It also aims to raise $124 billion in IRS revenue with strengthened tax enforcement.
In addition, the IRS will receive approximately $80 billion over the next 10 years, with $46 billion targeted at increased enforcement. While it is unclear at this point how these funds will be used, the government has declared its intention to increase “digital asset monitoring and compliance activities”.
What does this mean for you, as someone who owes back taxes? It means the IRS will soon have more manpower and better technology to find those in arrears. In other words, this is the time to face your tax issues head-on and get ahead of any enforcement action by the IRS.
Intention Matters
Just as a police officer is more likely to forgive your ticket when you’ve been respectful and have paid any previous tickets, the IRS will likely have more patience for your back tax issues if you’ve taken the first steps to make things right.
In short, your intention matters. If you’ve taken the time to understand what you owe and have either made contact with the IRS to apply for an extension or engaged a team of professionals to help resolve your back taxes, they will most likely be more forgiving than they would be if you’ve been ignoring the problem altogether.
Consider Your Options
If you decide to reach out to the IRS, there are several steps you can take to manage your back taxes:
- Ask for a short-term extension (180 days max) — while there is no fee to apply for an extension, there is a penalty to pay of 0.5% every month on the outstanding balance, as well as IRS interest charges (currently at 6.0%). You can either fill out the paperwork for this yourself or ask a tax expert to handle it for you. Note: this option is only reasonable if you need a short period to pay your taxes off — a maximum of 180 days.
- Apply for hardship extension for back taxes — the IRS offers some relief for those experiencing hardship. You can apply for an extension based on hardship through Currently Not Collectible status. You will need to prove that paying your back taxes would result in financial hardship. Part of this process involves providing IRS Form 1127, as well as statements of assets and liabilities, income and expenses. Interest and penalties will be applied to your outstanding balance.
- Ask for an Installment Agreement — in some cases, you can request to pay the IRS over a longer period through an installment agreement. Typically, you’ll need to agree to monthly payments and your total owing will need to be $50,000 or less.
- Borrow funds to cover your taxes — of course, it’s tempting to use a loan to cover your back taxes and free yourself from the worry of having the IRS come for you. There are several options when it comes to loans — in some cases, you could secure a personal loan, borrow from your 401(k) or even use a source of personal credit.
Each of these options comes with financial risk, and often sizable penalties or interest rates. Be sure to speak to a tax expert before deciding on this route.
Secure the Right Tax Team
The benefits of using tax experts to help you with your back taxes are many. First, there is peace of mind. Now that the IRS is gearing up for greater enforcement, it is more important than ever to give yourself the comfort of knowing you have a team of experts on your side.
Second, there is expertise. An experienced team of tax experts will take the time to fully understand your situation, help you minimize your overall tax burden and help navigate your options with the IRS.
Given that we expect the IRS to exercise an increased reach, with greater enforcement, it is critical to have a strong handle on your taxes, including any back taxes that you owe. If you or your business are in tax arrears or have been having tax problems such as IRS tax notifications or missed payments, it is important to clean house as quickly as possible.
In other words, if you’ve had reason to utter to yourself, “I owe the IRS back taxes. What now?”, you’re not alone. Take the time to find the right team of tax experts, both for your peace of mind and to help minimize the amount you’ll need to pay.
At Franskoviak Tax Solutions, we have helped our clients with tax planning for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, payroll taxes, IRS tax relief and tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes and more.
Start with a free consultation—we’re here to help you get ahead of tax problems, manage your back taxes owing and avoid unwanted attention from the IRS.
