Filing Back Taxes: What You Need to Know

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Nobody wants to run afoul of the Internal Revenue Service, but it can be unnervingly easy to do. Mistakes and oversights can happen. The IRS may be sending you notices or you may just be digging your way out of some past troubles and trying to avoid any future problems.

You might be surprised to learn that filing your tax returns can be the quickest way out of any back tax issues, but you'll have to protect yourself in the process. Here are some steps to follow to take control of your back taxes.

Get Your Tax Documents

When was the last year you filed? Do you have a copy of that tax return? Do you still have W-2s and other tax documents for the years you didn't file? You can request copies of your tax documents from the Internal Revenue Service if you are missing anything, or contact your employer or the institution that would have sent them to you.

Keep in mind that current or former employers or other establishments may not still have these documents on file, however, or at least they may not be easily accessible. There might be a fee if you choose this option.

It is worth keeping in mind, however, that the IRS's statute of limitations for tax documentation is three years. While you should always do your research and consider the circumstances, this means that you generally do not need to worry about locating tax documentation that is more than three years old. The IRS can only pursue tax issues older than three years if there are special circumstances, like substantially understated tax or fraud. In ordinary cases, however, if they accepted a tax return three years and one day ago, they generally cannot challenge it.

Prepare the Tax Returns or Hire a Tax Professional

Be sure to use reliable and easy-to-use software if you're going to prepare your tax returns yourself. Plan on spending about two to three hours on each tax return you need to file. TurboTax is a great program with free services. There are also many other software programs that can help you for free.

When filing yourself, make sure you are set for the appropriate tax year.

Regulations vary by tax year, and the software settings can be critical for compliance as well as your liabilities or refund. Filing for the wrong tax year can further complicate an already-challenging situation. In some cases, you might get a better result by hiring an experienced tax professional because they can help you with more complicated tax compliance and dealing with the IRS, if necessary.

Often, the best way to find a tax pro is to ask your friends. Look for someone with significant experience in preparing back taxes. If you need advice on handling incomplete tax documentation, or an advocate who will negotiate with the IRS on your behalf, a tax professional is the way to go.

Protect Your Tax Refunds

There are strict time limits for refunds, audits, and debt collection. In most cases, you have three years from the date your tax return was due before your refund "expires." But if you owe other tax debts—because you have a balance due from another year, for instance—your refund will typically be applied to that debt.

Pay Your Tax Debts

Create a plan for paying off your tax debts if it turns out that you owe the IRS money. You may also need to plan on how to protect yourself from an IRS investigation, assessment, lien, or possibly a levy, and this is where a tax professional can be helpful. Your plan of action might be as simple as setting up an installment agreement with the IRS for a monthly payment plan or asking for an offer in compromise.

Depending on your circumstances, an installment agreement can give you up to 72 months to pay, but you must owe the IRS $50,000 or less to qualify. Simply file IRS Form 9465, the Installment Agreement Request, with your tax return. You might also be able to establish an installment agreement online. If you owe less than $10,000, your request should most likely be automatically approved.

An offer in compromise is a bit more complex. It involves reaching an agreement with the IRS to pay less than your full balance due. An offer in compromise is typically used only if you are unable to pay through an installment plan. You will usually need the help of a professional for this, and it may be noted on your credit report.

For an offer in compromise, you must establish that you cannot pay your balance through an installment agreement or by any other means. Either way, address the situation as promptly as possible.

Ignoring the IRS can get you into big trouble very quickly, as they can take action to place a lien or levy on your assets, which may include bank accounts, your home, or your car.

Plan Ahead for Next Year

Your next plan of action should be to focus on the future. It is a good opportunity to review your overall tax situation and to come up with strategies for reducing your taxes and achieving your financial goals. Again, a tax professional can help.

If you think you might owe the IRS next year as well, consider making estimated tax payments in advance. They are generally required for independent taxpayers not taking withdrawals from a payroll. Making quarterly estimated tax payments can also help you to avoid penalties on your annual tax return.

Tax Laws You Need to Know

Sometimes the IRS will take an educated guess about what your tax liability might be. The IRS will then send you a notice of proposed assessment, or even file a return on your behalf. You can reduce or eliminate the IRS’s proposed assessments by filing your back tax returns. The IRS can and will impose penalties and interest on tax liabilities that aren't paid in full by the deadline for the tax return. As mentioned, they can also place a lien or levy on your assets.

Your tax information is absolutely and completely confidential. A tax professional is ethically and legally obligated not to share your information with anyone—including the IRS—unless they have your explicit authorization.

Filing Back Taxes

Late tax returns must be filed on paper and mailed to your local IRS Service Center. You can use tax software to prepare your returns, but then you must print them out and mail them in. You cannot file late returns electronically.

Mail your tax returns in separate envelopes and send them by certified mail. This way you'll have proof that the IRS received each individual return. Mailing them in separate envelopes will also help prevent the IRS from making any clerical errors in processing them.

You can also hand-deliver your tax returns to your local IRS office if time is of the essence. Make extra copies of page one of each return and take the copies with you. Ask the IRS representative to stamp the copies as received. These receipts will provide evidence of what you filed, when you filed, and where you filed.