Understanding Back Taxes: An Overview

Accountant calculating back taxes

Taxes play 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 tax 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 back taxes from current taxes or taxes that are past due. In this article, we’ll explore the concept of back taxes – what they are, how they differ from past-due taxes, and the steps to resolve them.

What are back taxes?

Back taxes represent the total taxes you owe the IRS that have not been settled from prior years. This should not be confused with current taxes, which refer to your balance due for the current tax year, or past taxes, which refer to the amount overdue but still within the current tax year.

Common reasons for owing back taxes

  • Failing to file. One of the most common reasons individuals may find themselves owing back taxes 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 taxes due. Sometimes you may have incorrect withholding or fail to make sufficient estimated tax payments. This would leave you with an outstanding balance that could become back taxes.
  • Audit adjustments. When tax authorities uncover discrepancies in taxpayers’ reported income or deductions, this could lead to additional tax liabilities. For instance, an audit may reveal incorrect deductions or unreported income, which would lead to additional taxes 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 back taxes due to filing mistakes.

Consequences of owing back taxes

Unpaid taxes should never be taken lightly. Failing to address back taxes has serious consequences, including:

  • Penalties and interest. Tax authorities typically impose penalties and interest on unpaid taxes, which can significantly increase the amount owed over time.
  • Collection actions. Tax authorities have various tools at their disposal to collect back taxes, such as wage garnishment, bank levies, property liens, and asset seizures.
  • Legal consequences. Continued non-payment of back taxes 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 back taxes.


5 Steps to resolving back taxes

Facing your tax debt head-on is the first step towards financial peace of mind. Follow these steps to resolve your back taxes effectively.

  1. Confirm the accuracy of your tax debt with the IRS. Cross-check the IRS transcript with your personal tax records. 
  2. Consider recruiting expert help: If you battle to understand tax laws or have special considerations, you would benefit from Fusion CPA tax help. Whether you have a high net worth or a complicated tax situation, we can ensure compliance for you.
  3. 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.
  4. 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.
  5. Stay compliant going forward: After resolving your back taxes 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 tax filings. Additionally, our CPAs can offer ongoing support to help you stay compliant and avoid costly mistakes that could lead to back taxes. 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.