Tax collection plays a crucial role in maintaining economic stability and promoting growth. Therefore, failing to meet IRS obligations has significant repercussions for individuals and businesses alike.
Paying penalties for unfiled returns doesn’t exempt you from submitting those returns. Not filing or underreporting income simply means that you would need to file back taxes.
To ensure compliance, it is important to distinguish these from current tax or those that are past due. In this article, we’ll explore the concept of back taxes, including what they are and the steps to resolve them.
Definition
Back taxes represent the total amount you owe the IRS that have not been settled from prior years. This should not be confused with current tax, which refer to your balance due for the current year, or past tax, which refer to the amount overdue but still within the current year. Some common reasons for owing back taxes include:
- Failing to file. One of the most common reasons is due to not filing their returns. This not only puts you at risk of penalties but also eliminates the opportunity you have to report your income and claim deductions. The worst part is that penalties typically accrue based amount of tax owed and the length of time the return remains unfiled. This compounds your overall tax liability.
- Underpaying on tax that is due. Sometimes you may have incorrect withholding or fail to make sufficient estimated tax payments. This would leave you with an outstanding balance.
- Audit adjustments. When tax authorities uncover discrepancies in taxpayers’ reported income or deductions, this could lead to additional liabilities. For instance, an audit may reveal incorrect deductions or unreported income, which would lead to additional tax and possible penalties.
- Filing errors. Mathematical miscalculations, incorrect reporting of income or deductions, or overlooking certain tax credits can result in an understatement of tax liability. Employing capable accounting software can help avoid such errors and mitigate the risk of owing authorities money due to filing mistakes.
Consequences
Unpaid tax should never be taken lightly. Failing to address this has serious consequences, including:
- Penalties and interest. Tax authorities typically impose penalties and interest, which can significantly increase the amount owed over time.
- Collection actions. The authorities have various tools at their disposal to collect these what you owe, such as wage garnishment, bank levies, property liens, and asset seizures.
- Legal consequences. Continued non-payment can result in legal action by tax authorities, including civil lawsuits, tax liens, and in extreme cases, criminal charges for tax evasion.
It is important to be proactive about resolving any tax problems you may have.
5 Steps to resolving any issues
Facing your tax debt head-on is the first step towards financial peace of mind. Follow these steps to resolve any problems effectively.
- Confirm the accuracy of your debt with the IRS. Cross-check the IRS transcript with your personal tax records.
- Consider recruiting expert help: If you battle to understand tax laws or have special considerations, you would benefit from Fusion CPA help. Whether you have a high net worth or a complicated tax situation, we can ensure compliance for you.
- File past due returns: To get back in the good graces of the IRS you’ll need to file all past due returns. This is crucial for becoming compliant.
- Explore your payment options: Once you know where you stand, you can negotiate a resolution. You may be eligible for various payment plans and settlement options. However, it is important to weigh the pros and cons of each of the options with your CPA.
- Stay compliant going forward: After resolving your issues, it is important to take steps to avoid finding yourself in this situation again. Meanwhile, adjust your withholdings to ensure you’re paying enough throughout the year, and partner with an expert to help you keep accurate records.
Fusion CPA can help you navigate tax complexities and mitigate potential consequences. Overall, this means that we identify potential deductions and credits, to ensure accurate filings. Additionally, our CPAs can offer ongoing support to help you stay compliant and avoid costly mistakes. Contact us for help today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.