No small business owner wants to be years behind on their taxes, but it can happen. Good news: you’re not the only one. Even some of the most seasoned business owners have been in this situation at some point.
Technically, there is no limit to how many years of back taxes you can file. But there are rules, processes, and requirements in place that keep most taxpayers from falling more than a few years behind without knowing they owe the IRS money.
If you fall behind on your taxes, you can lessen the damage by filing your back tax returns as soon as possible. The sooner you file your late tax returns, the sooner you can get out of this stressful situation and stop paying fees and fines. Remember that the penalties, interest, and steps the IRS takes to get what it is owed from you will only worsen as time goes on.
This guide will tell you what you can do to catch up on your unpaid taxes, including how much time you have, how to file your back taxes, and what the IRS will do if you don’t pay up.
what are the back taxes?
Back taxes are just the amount of money you owe the IRS that you didn’t pay by the deadline. It could have been because of a mistake, needing to make more estimated tax payments, or a hard time with money. No matter why you miss your filing deadline, the IRS will add interest and penalties, which will increase your tax bill.
how many years back can taxes be paid?
IRS Policy Statement 5-133, Delinquent Returns-Enforcement of Filing Requirements, says that you must have filed returns for the last six years to be in good standing.
Sometimes, the IRS may ask for more than six years ago tax returns. This means they’ll want you to go back further and show them your income, expenses, and other information from more than six years ago tax returns. Most of the time, this is asked for the following reasons:
- The taxpayer has a record of not following the rules.
- A return that is more than six years old has a hefty tax bill.
- There is a business involved, and the IRS plans to look at the returns more closely for any signs of possible noncompliance.
- There is a look into possible illegal ways to make money.
- As part of another in-depth investigation, local revenue officers need more forms.
If you want a tax refund, you can only get it three years after the original deadline unless one of the following applies:
- You want a refund because you had to pay taxes on lousy debt or worthless securities. In this case, you have up to seven years to ask for a refund.
- You can’t handle your money because of a physical or mental disability.
Even though the IRS can ask for your tax returns from the last six years, they can’t collect taxes that are more than ten years old because of a law called the statute of limitations. But remember that they may try harder to get paid as this 10-year deadline approaches.
In some cases, the IRS may stop collecting for a short time. The most likely reasons for this are
- If you are filing for bankruptcy, the court will automatically stop the IRS from taking any collection actions against you. This stoppage lasts for the length of the bankruptcy case plus six months.
- The IRS is working with you to devise a payment plan, an offer in compromise, or another way to get out of paying the debt.
how do I find out how much I have to pay?
If you don’t know how much back taxes you owe, there are a few ways to find out:
- Log in to your online tax account at IRS.gov/account to see how much you owe and what you’ve paid in the last five years.
- Check your account for email alerts about your back taxes.
- Fill out Form 4506-T to get your income transcript by mail.
- You can talk to an agent about your business’s back taxes by calling 800-829-4933 from 7 a.m. to 7 p.m. local time.
- Get the amount from letters the IRS sends you about your tax bill, how much you owe, and how much you have paid.
why do you need to file
Sec. 6020 allows the IRS to make a substitute tax return if you don’t file your back taxes. They will tell you ahead of time what they plan to do and give you a chance to respond. They will do it for you if you miss the deadline for filing your tax return.
This may seem simple, but letting them fill out the substitute return for you can make your tax bill much bigger.
The IRS only uses your business income to figure out your substitute return. It leaves out exemptions, deductions, and tax credits that could help you pay less in taxes.
For example, an IRS substitute return won’t include itemized deductions, like insurance, casualty and theft losses, advertising costs, office supplies, bank fees, business vehicle expenses, legal fees, and other allowable business deductions. The IRS’s return also leaves out tax credits that could help your small business save money.
You have 30 days from when you get the letter to fill it out and send it in return. You can also send in IRS Form 870 and IRS Form 870-Consent to Assessment and Collection form explaining why you don’t have to file a return.
how do you begin?
Here are some ideas to help you start catching up on your back taxes.
get in touch with the IRS as soon as you can.
Getting in touch with the IRS is one of the most important first steps you need to take if you still need to do so. Many people are scared of the IRS, but it’s important to remember that they want to work with you to take care of your tax debt. If you talk to them immediately, you can start working on a plan to pay off your back taxes immediately.
Even though it might be tempting, you should always pay attention to the IRS. The longer you don’t talk to them, the more likely they’ll take aggressive steps, like tax liens and levies.
So, when you do hear from the IRS, please respond as soon as you can and let them know that you plan to send in your late tax returns. This keeps the lines of communication open, which could lead to fewer late fees. Fill out any forms that are needed and give any documentation that is asked for.
put your books and records in order.
Keeping track of your books is vital for any business, but it’s even more critical if you need to catch up on your taxes. If you still need to keep up with your books, now is the time. To file accurate back taxes and avoid underpayments that will lead to penalties and interest charges, you need to keep your books up to date.
Catching up on years of bookkeeping can be challenging, so if it’s more than you can handle, consider hiring a professional or sending the work to a service like Countick.
get a tax pro to help you.
Depending on how much you owe and how complicated your returns are, it may be best for you to get help from a CPA or tax advisor.
Make sure the CPA you hire knows how to deal with back taxes and has the experience. You’ll need to give your professional tax access to your tax documents, such as notices and letters from the IRS, tax forms, records, receipts, business income, expenses, and the last tax return you filed.
even if you can’t pay, file.
Even if you can’t pay the taxes you owe, it’s better to file your returns and work out a payment plan with the IRS than to wait and get charged for not filing. The earlier you file, the less you’ll owe in the long run.
as soon as possible, start making payments.
If you owe the IRS money, you must pay them as soon as possible. This will not only keep late fees and penalties to a minimum but also help you negotiate a payment plan or offer in compromise.
Don’t expect to hear back from the IRS immediately after you send in your back taxes. Processing your tax returns could take a few months to a year. The good news is that this delay gives you more time to devise a plan for how you will pay.
if you don’t pay your back taxes, what happens?
Ignoring the IRS is the worst thing you can do; they will still go after your tax debt even if you do. Even though agents won’t show up at your door, they will punish you with expensive fines for your tax debt. Here is what will happen if your payment doesn’t make it to the IRS.
- The IRS sends you a note stating you didn’t file and pays your taxes by the due date. This notice will tell you how much you owe, including any late fees or interest. There is also information about how to pay off your balance.
- If you don’t respond to the first letter, the IRS follows through on its promise to add interest and fees to the amount you owe in back taxes. Every month, 0.5% of the total amount of taxes owed is added to the unpaid balance as a failure to pay the Penalty. This fee will be at most 25% of the balance. If you haven’t filed a return, you will also have to pay a 4.5% Failure to File Penalty.
In addition to the penalties for failing to pay or file taxes, the IRS also adds interest to your back taxes daily.
- If you still need to pay your back taxes after getting letters from the IRS, they will try harder to get your money. You might notice that they plan to seize your assets, such as your bank accounts, to pay your taxes. They can also take money out of your paycheck or put a lien on your property for unpaid taxes.
what happens if you can’t afford to pay your back taxes?
Many business owners must catch up on their taxes because they can’t pay them. Remember that you don’t have to pay the total amount if you can’t. You can still make partial payments that will lower your total debt by reducing penalties and interest.
In this case, the IRS has a few ways to help you. The most common solution is a payment plan that is easy to make. Another way is to show that you can’t pay what you owe so that the IRS will agree to a settlement that you can pay. Another choice is penalty abatement when the IRS reduces the penalties on your back tax debt. But to get this kind of help, you have to show a good reason, like a natural disaster or a death in the family.
how can Countick help?
The Countick is here to help if you think paying back years of taxes is too much for you. We’ll get your taxes in order, even if you need to catch up on your bookkeeping. The tax experts at Countick can quickly finish your past accounting so you can take advantage of credits or deductions that could lower your back taxes. With our skilled and experienced bookkeepers on the job, you’ll have more time to focus on running your business.
in conclusion
Working with the IRS to clear your record is always okay if you need to catch up on your taxes. The IRS will accept tax returns from up to six years ago, so don’t worry if you’re in this situation. If you can’t pay your back taxes, the IRS has several ways to help you get caught up. Any way you look at it, it’s best to take care of your back taxes as soon as possible so you can focus on the future and growing your business.
