The concept behind the phrase “back taxes” is a fairly straightforward one: back taxes are comprised of taxes owed during a particular tax year that aren’t paid during that year. In other words, if a taxpayer can’t pay all of their taxes for a year, they are said to owe back taxes.
The idea of back taxes may be pretty simple, but dealing with back taxes can be complex and difficult.
In general, the IRS has 10 years to collect back taxes. After that time, the statute of limitations prevents any further collection action. The time limit starts to run from the time the tax was originally assessed.
For example, taxes from the year 2011 were probably assessed sometime around April 15, 2012 (depending on when the taxpayer filed the return). Thus, a person who owes back taxes from 2011 is subject to collection actions by the IRS until roughly April 15, 2022.
During that 10-year period, the IRS has many tools at its disposal to collect back taxes. For instance, the IRS can garnish a taxpayer’s wages to recover the unpaid taxes. The IRS will also impose monthly penalties for failing to pay the taxes as an incentive to pay the back taxes sooner rather than later.
While the IRS can be unrelenting in its hunt for back taxes, the agency recently expanded its relief program for taxpayers who owe it money. Dubbed “Fresh Start,” the program allowed for penalty relief if a taxpayer was unemployed for at least 30 consecutive days in 2011 or 2012, or if the taxpayer was self-employed during the same period and experienced a 25% drop in business income.
In addition, the IRS also made it easier to use an installment agreement to lessen the burden of back taxes. An installment agreement allows a taxpayer to pay their back taxes in small, manageable chunks, thus spreading the financial impact of repayment over a longer period of time.
Fresh Start also enlarged and enhanced the IRS’ Offer in Compromise (OIC) program. An Offer in Compromise is an agreement between a taxpayer and the IRS to settle the taxpayer’s debt for less than what is actually owed to the IRS. The Fresh Start program gave the IRS more flexibility in performing the financial assessments necessary to determine whether a taxpayer should receive on OIC or not.
All of these options can help taxpayers who owe back taxes get out of debt with the IRS. The best strategy, however, is to face the problem of a large tax bill proactively before back taxes even become an issue.