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Taxes are complicated, and if you get behind on paying them, things can quickly get messy.
Whether you're behind on a tax bill or need to collect a refund from an unfiled prior-year return, here's a quick-start guide to back taxes and how to file past-due tax returns.
Back taxes, definition
When tax bills are delinquent or overdue, typically from previous years, they are referred to as back taxes. The IRS begins to charge penalties and interest on late or unpaid taxes the day after the tax filing deadline for that year. If the bill remains unpaid, notices will follow and the agency may eventually begin other collection measures.
The IRS typically doesn't charge penalties or fees on late or unfiled tax returns that result in a refund. However, there are many reasons why people in this group should consider filing their prior-year tax returns. For starters, you can't collect your refund until you file, and if you don't file within three years of the tax deadline for that year, you forfeit your right to collect the funds.
How to file back taxes
If you're behind on filing your tax returns and need to file for prior years, you can. Here are some things to remember:
1. Gather your documents.
You'll need to gather tax documents for the tax year in question. For example, if you're filing your 2021 tax return, you'll need your W-2, 1099s and any other pertinent documents from 2021. Our tax-prep checklist covers additional information you may need to access.
2. Get a transcript if you need one.
If you don't have those documents, you can request an IRS tax transcript for that year. Although you won't get exact photocopies of the documents, you'll get the information in those documents, which you'll need to get your return done.
3. Use the proper forms.
Don't file a 2021 tax return using 2022 forms. Tax rules and tax forms are different every year. You can search for older forms and instructions on the IRS website.
4. Consider a payment plan if you can't afford your tax bill.
If you're behind on your taxes because you can't afford them, several tax relief options are available, including offers in compromise, penalty abatement and payment plans.
5. Don't be afraid to ask for help.
Many tax software packages allow you to file prior-year tax returns, and tax pros do prior-year returns, too. They can also help you discover which deductions and credits you might have been eligible for during the tax year.
How many years can you file back taxes for?
Technically, you must file all required tax returns and the IRS can come after you for any year that went unfiled. However, IRS Policy Statement 5-133 also says that it takes managerial approval to go back more than six years to enforce delinquency procedures.
What happens if you don't pay your back taxes?
If you don't file a return by the tax day of the year it's due (typically in mid-April), you'll be subject to a late-filing penalty. On top of that, any taxes you owe after the filing deadline passes will begin to amass fees in the form of penalties and interest. The IRS will usually inform you that you're in delinquency by sending notices and bills to the address on file for you. If those bills are ignored, the agency will ramp up the collection process by assessing a tax lien and eventually a tax levy.
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What are the advantages of filing back taxes?
Catching up on past-due tax returns can seem overwhelming, but there are a few things in it for you.
1. You avoid having the IRS do it for you.
This is called a substitute return. The IRS takes the information it has on hand for you, uses it to cobble together a tax return, and sends you the bill. That may sound convenient, but it's almost always a guaranteed headache. In addition, the IRS often doesn't know which tax deductions or tax credits you might have qualified for, leading to a bill higher than what you might've had if you'd done it yourself.
2. You can pay your tax bill in installments.
Filing a tax return late and paying a tax bill late are two different things with two different sets of penalties. If you can't pay the bill, don't put off filing your tax return. The IRS offers several payment plans (and other installment programs) to pay over time.
3. The government might owe you money.
If you're due a tax refund for a prior year, claim it by filing your tax return for that year. You only have three years from the original tax return due date to claim old tax refunds.
4. You can avoid problems getting a loan.
Copies of current tax returns are a common requirement for getting mortgages and other loans, such as student or business loans. Being on top of your taxes minimizes issues with producing these documents when needed most.
5. Safeguard your Social Security.
Freelancers or other self-employed workers who don't file their tax returns won't receive credit toward their Social Security or disability benefits because their income hasn't been reported to the agency.