Back Taxes: What to Do if You Owe the IRS Money

Have you received a notice from the IRS stating that you owe back taxes, or do you know that you have unpaid taxes that the IRS might not know about yet? If so, you have three options.

This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.

Paying IRS Back Taxes in Full

If you know that the amount you owe is correct or your tax bill is so small that it’s not worth the trouble of disputing, you can agree to the amount owed and pay in full.

An IRS notice will include a full payoff amount including interest and penalties. If you’re paying back taxes on unreported income, pay the amount you calculated on your tax return, and the IRS will bill you for any remaining interest or penalties.

You should also check your eligibility for penalty relief. Depending on why you owe IRS back taxes, you may be able to have the penalties reduced or removed.

Make Alternative Payment Arrangements

If you don’t dispute the amount of back taxes but can’t afford to pay, you have three main options to pay taxes.

  • Installment agreements are payment plans that pay your taxes in full over time. Interest and penalties apply to your outstanding balance, but the failure to pay penalty is cut in half when you’re using automatic payments.
  • An offer in compromise is a payment for less than the total amount that you owe to satisfy the debt. To qualify, there must be little chance that you’ll ever be able to pay your tax debt in full. Examples of qualifying individuals include elderly people on fixed income and people who have suffered a permanent disability.
  • Currently not collectible status means that you can’t pay the IRS right now but should be able to in the future. Penalties and interest still accrue, but the IRS will often pause more drastic collections measures. Common situations where you may be approved for currently not collectible status include losing your job or suffering a serious illness.

Dispute the Amount Owed

Most taxpayers should at least consider disputing any IRS notice they receive. You may challenge either that you owe back taxes at all or the amount the IRS says you owe.

For example, the IRS notice may be based on a clerical error that resulted in the IRS not correctly calculating what you owe.

The IRS computer might not match up the W-2 it could from your employer to the copy you provided and think both W-2s are separate income. You may also have income double reported on 1099-NEC and 1099-K or have not entered W-2s or 1099s correctly.

Additionally, even if you did fail to report income, you may be able to claim deductions against that income that you didn’t previously claim.

Can You Go to Jail for Back Taxes?

Simply not paying your taxes is generally not a crime. You generally only risk facing criminal charges if you were trying to evade taxes.

A financial hardship in one year or a mistake on your tax return generally is not a criminal offense. However, you still want to make payment arrangements as quickly as possible to stop the IRS from filing a tax lien or taking other collection actions.

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