How to Settle Back Taxes with the IRS: A Quick Guide

How to Settle Back Taxes with the IRS: A Quick Guide

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The important things to know about settling back taxes with the IRS

A letter from the IRS saying you owe taxes is never a welcome surprise. But we know it can also be extremely scary – especially if you don’t understand the terminology, why you owe what they’re stating, and in particular, if you can’t afford to pay. 

However, as scary as it might be, panicking – or worse, ignoring it – are the worst things you can do, as the amount due can quickly spiral upwards through interest, fees, and penalties. 

So, first things first: don’t worry!

For one thing, you’re not alone. According to IRS data, over 9 million Americans owed back taxes in 2022. It’s also often far easier to resolve than you may first think, and the IRS offers a number of options to help you manage and resolve it depending on your circumstances.

So read on to understand all the basics of how to settle back taxes. 

And then, if you’d like some support, give us a call. Here at Tax Relief Helpers we have over 20 years of tax-resolution experience and an army of experts ready to help you manage and eliminate your tax debt. 

Tips for settling back taxes owed

The first step in dealing with back taxes is understanding exactly what they are, what the penalties are, and if you definitely owe them. 

What are back taxes? 

Simply put, back taxes are taxes that weren’t paid when they were due. This can happen for a number of reasons, such as:

  • You didn’t have enough money withheld for taxes in your paychecks throughout the year.
  • You’re self-employed and didn’t know of all the tax requirements.
  • You were unaware that unemployment benefits are taxable.
  • You didn’t report profit from the sale of an investment. 
  • You made a math error in your tax return. 
  • You deliberately under-reported your income.
  • You forgot to file a return. 
  • Or many other simple, often unintentional, reasons. 

What are the penalties for back taxes? 

It’s important to know there’s a big difference between failing to file a return and owing back taxes. The consequences are generally far worse if you’ve not filed your returns on time, so it’s important to always submit – even if you can’t pay your taxes in full. 

  • Failure to file penalty: interest plus a 5% penalty for each month the return is late, up to a maximum of 25% of your total tax debt.
  • Failure to pay penalty: interest plus a 0.5% penalty for each month you’re late paying, up to a maximum of 25% of your total tax debt. 

Do you definitely owe back taxes? 

Before going any further, you want to make sure you definitely owe back taxes. It’s possible that you, or even the IRS, have made a mistake on your return, so check through it carefully to make sure everything looks accurate. If you find an error, you can file an amended tax return with the form 1040X, which will help you avoid penalties, fees, and interest. 

If everything looks accurate, then you do indeed owe back taxes. But don’t worry, it’s now just a case of working out the best option for reducing your debt and then paying it. 

Steps to settle back taxes and avoid penalties

If you do owe back taxes to the IRS, before getting into your options for settling back taxes, you want to do everything possible to reduce any penalties and interest charges. 

There are a number of options for reducing your penalties, which include: 

The IRS provides information about all your different options, and how to apply for each, on its website. But if you’re confused or overwhelmed, we’d always recommend speaking to a professional – such as our team at Tax Relief Helpers. With years of experience and in-depth knowledge of the tax system, we’ll be able to give you the best advice and help you navigate through the entire process. 

Options for settling back taxes

Once you’ve done everything you can to minimize any penalties, it’s time to make a plan for paying off your back tax debt. 

The IRS offers a variety of options to help you pay back your taxes in a way that will suit your personal financial circumstances. These include short-term plans, long-term plans, installment agreements, and even an “Offer in Compromise” which is essentially negotiating a settlement for back taxes and reducing the total debt due

The main options for settling back taxes are: 

  • Short-Term Payment Plan: for debt under $100,000; up to 120 days to pay, no fees, but interest applies. 
  • Long-Term Payment Plan: debt under $50,000; more than 120 days to pay, fees and interest apply.
  • Guaranteed Installment Agreement: debt under $10,000 and no late filings or payments in the last 5 years; monthly payments for up to 3 years and commitment to file and pay on time in future.
  • Streamlined Installment Agreement: debt under $50,000; monthly payments with up to 6 years to pay.
  • Non-Streamlined Installment Agreement: debt over $50,000; individualized agreement without the need to provide detailed financial statements. 
  • Partial-Payment Installment Agreement: debt under $25,000 and proven financial hardship; reduction of total debt and agreed monthly payments based on affordability after basic living expenses. 
  • Offer in Compromise Resolution: negotiate a lower amount to settle based on an inability to pay the full tax debt. 

While the above summarizes the core aspects of each option, which one to go for will depend on a lot of additional factors specific to your individual situation

This is another reason why it’s usually worth speaking with a professional tax resolution advisor, such as our team at Tax Relief Helpers. We know all the options that will suit your personal circumstances, but importantly, we also know how the tax office thinks and acts, and what they’ll be likely and willing to agree on. This is powerful insider information that will help ensure you find the best possible outcome for your tax debt. 

No 1 tip for settling back taxes owed?

Checking that your tax debt is correct, minimizing penalties, and organizing the best payment plan are the three main steps in how to settle back taxes. 

But when it comes to the best tips for settling back taxes owed, there’s one that comes above all others: Don’t ignore it! 

The risks of ignoring any tax you owe to the IRS are far worse than dealing with it. From penalties and interest to the seizure of assets, ignoring a tax debt will only result in it costing you much more:

  • Failure to pay penalty: 0.5% penalty is applied each month, up to 25% of your total debt. 
  • Failure to file penalty: 5% penalty is applied each month, up to 25% of your total debt. 
  • Interest: From the day of your tax payment deadline until the debt is paid off, interest will be applied. 
  • Tax Lien: The IRS can place a tax lien on your property or assets, claiming it as their own until your debt is paid off. 
  • Tax Levy: A lien can eventually turn into a levy, where the government seizes your property and assets entirely to satisfy the debt. 
  • Garnished Wages: The IRS can instruct your employer to send part of your wages directly to the IRS to cover the debt. 

Ignoring tax debt, or even not knowing all your options, can lead to serious financial problems. But there are plenty of ways to resolve back taxes that will keep you in a good financial position, help you pay off your debt as quickly as possible, and avoid any interest and penalties, so confronting it is always a better option than ignoring it. 

Negotiating a settlement for back taxes

We know how intimidating it can be when you have to deal with tax debt and the IRS, especially if the debt is a significant amount. 

At Tax Relief Helpers, we can explain all of your options, help you find the best solution, speak to the IRS on your behalf, and negotiate settlements for your back taxes that will save you considerable amounts of money, time, and stress. 

If you owe the IRS more than $5,000, don’t let it continue to give you sleepless nights. Give us a call, and let us help you take control.