What are Back Taxes?
Back taxes are state, federal, or local taxes that are past due.
How Do Back Taxes Work?
For example, let’s assume that John Doe forgets to file his tax return for 2011. He does not file for an extension past the April 15, 2012, deadline. His employer, his lenders, and the financial institutions that hold his saving and investment accounts all report information on John Doe’s accounts and income to the Internal Revenue Service.
John Doe thinks that if he doesn’t file a tax return, he is not liable for any taxes. This, of course, is incorrect. The IRS determines, based on the information it receives, that John Doe owes at least $15,000 in back taxes. The IRS sends John Doe a notice of proposed assessment, which represents its estimation of what John owes. But in addition to requiring John Doe to pay the $15,000, the IRS also assesses $5,000 of interest and penalties.
Why Do Back Taxes Matter?
Back taxes can be resolved with the IRS; these often involve establishing monthly payment plans or similar arrangements, and they usually require compliance with all filing and payment responsibilities afterward. In many cases, the IRS will hire a private collection agency to collect unpaid taxes.
Sometimes the IRS will apply future tax refunds toward a tax debt. In some cases, the IRS will seize property, seize assets, or place liens on property. Failure to pay taxes can also involve imprisonment.
Many people choose to hire a private tax professional to help negotiate a payment plan with the IRS, though this is not required and the field is the subject of considerable controversy. Individuals and businesses often choose (and in many cases are required to) make estimated tax payments on a periodic basis throughout the year in order to avoid owing.