Back Taxes: Understanding the Consequences and Navigating the Solutions

According to the IRS, Americans owe more than $120 billion in back taxes. Many such individuals from Shelby County also owe back taxes. While the reason for not paying taxes can be intentional or unintentional, the consequences of back taxes are alike for everyone. 

However, Shelby County, Alabama professional tax services can provide invaluable support in navigating the back tax solution for those in Shelby County, Alabama. Nonetheless, paying the taxes on time is always advisable to avoid facing interests, penalties, and other consequences.

Understanding what back taxes are

Back taxes are the taxes an individual owes from the prior year. While failure to pay taxes is not a criminal offense, it is considered a serious misdemeanor, which the law can punish. Here are some of the most common reasons why people owe back taxes:

  • Filing a tax return but failing to pay the taxes owed.
  • Failing to report part or entire income earned during the year.
  • Negligence in filing a tax return.

It is prudent to mention that intentionally and knowingly deceiving the IRS to avoid paying taxes falls under the category of tax evasion, which is a tax fraud crime. 

The consequences of unpaid back taxes

If an individual fails to file or pay taxes, they will have to pay the following penalties that may also accrue interest:

  • The penalty for failure to file your tax is 5% of the unpaid tax per month, subject to a maximum of 25% of the taxes not paid.
  • The penalty for failure to pay your tax is 0.5% of the unpaid tax per month, subject to a maximum of 25% of the unpaid tax.
  • If an individual faces penalties for failing to file and pay the tax, a consolidated penalty at the rate of 5% of the unpaid tax per month (4.5% for not filing and 0.5% for not paying) will be applicable.
  • Individuals with an approved payment plan face a reduced penalty of 0.25% per month.

However, if you owe an unpaid tax from the previous years, here’s what will happen:

  • The IRS will put you in the Automated Collection System and issue a lien on your wages.
  • The IRS will terminate the refund you may be entitled to in a later year and deduct it from the taxes you owe.
  • The back taxes you owe will continue to accrue interest, which is presently 5% per annum.
  • The IRS may file federal tax lien or other levies and collect the back taxes from your money and assets. Some common levies are wage, accounts receivable, and bank levies.
  • You may be banned from traveling abroad, and your case may be handed over to a debt-collection agency.

What to do if you owe back taxes

Here’s what you can do if you owe back taxes to the IRS:

  • Apply for a payment plan, also called an installment agreement, with the IRS.
  • Apply for an offer in compromise to reduce your tax debt.
  • Request the IRS for a delay in collection.
  • Apply for the ‘currently not collectible’ status.
  • Use your 401(k) account or apply for a personal loan to repay the tax debt.