What Are Back Taxes?
Back taxes are taxes that were partly or completely unpaid in the fiscal year in which they were due. Unpaid back taxes at the federal, state, and/or municipal levels may exist for taxpayers. On a regular basis, back taxes accrue interest and penalties.
- Back taxes are taxes that should have been paid but were not.
- Back taxes are subject to fines and interest and must be repaid on time.
- If overdue taxes are not paid, substantial legal action, such as tax liens, wage garnishment, or jail time, may be taken.
Understanding Back Taxes
Back taxes are taxes outstanding from a previous year. A taxpayer may fall behind on their tax payments for either deliberate or inadvertent causes. Filing a return but failing to pay the tax burden; failing to disclose all income made during the tax year; and forgetting to submit a tax return are some of the causes. If a taxpayer fails to submit a tax return, the penalty is 0.5% of the amount owed.
This penalty is assessed every month or portion of a month until the tax is paid in full or the penalty exceeds 25% of the tax payable. Furthermore, the IRS assesses interest on the outstanding balance. The IRS’s interest rate fluctuates quarterly. The interest rate is 3% as of the third quarter of 2020. As the overall tax obligation grows each month owing to penalties and interest, it may quickly balloon into a sizable sum.
Unpaid back taxes may be a severe problem for many taxpayers who lack the financial means to pay them. Depending on the circumstances, the government may pursue one of many ways to collect unpaid taxes, such as filing charges, demanding immediate payment, or sometimes providing a voluntary disclosure program that helps prevent criminal charges and provides for a range of payment alternatives. Failure to pay taxes may result in jail.
Consequences for Unpaid Back Taxes
The IRS may confiscate property, assets, or lay liens on property in certain circumstances. The IRS may file a federal tax lien in order to notify other creditors of the taxing authority’s legal entitlement to a taxpayer’s assets and property.
The IRS may also garnish a taxpayer’s earnings and seize their bank accounts up to the whole amount of taxes owing. If the taxes are not paid, the tax authorities may utilize a tax levy to lawfully confiscate the taxpayer’s assets (such as bank accounts, investment accounts, autos, and real estate) to collect the money owing. A lien protects the government’s interest or rights in an individual’s or business’ property while the tax obligation is overdue, but a levy allows the government to take and sell the property to satisfy the tax debt.
The IRS delegated the collection of outstanding back taxes to a commercial collection firm in 2016. However, individuals who are unable to repay their taxes may often negotiate a lower settlement with the IRS via an Offer in Compromise, either directly or through a tax attorney.
A tax lien is a legal claim made by a government agency on the assets of a noncompliant taxpayer. Tax liens are used as a last option to compel a person or company to pay outstanding taxes.
If a property owner fails to make property tax payments or owes income taxes, the government may issue a tax lien on the property. In other words, the federal and state governments may file tax liens for outstanding income taxes, while local governments can post tax liens for delinquent property taxes or income taxes. The asset will not be sold because of the lien. Instead, it assures that the tax authorities has priority over other creditors competing for the individual’s or business’s property.
A tax lien also restricts the taxpayer from selling or refinancing the assets to which the lien has been connected. The lien continues in effect until the tax due is satisfied or the statute of limitations on the debt runs out.
If the taxes are not paid, the tax authorities may lawfully confiscate the taxpayer’s assets (such as bank accounts, investment accounts, autos, and real estate) to collect the money owing. A lien protects the government’s interest or rights in an individual’s or business’ property while the tax obligation is overdue, but a levy allows the government to take and sell the property to satisfy the tax debt.
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