'Tis the season... to pay back taxes...

Navigating IRS back taxes can be a frustrating and maddening task. But know that you're not alone and there are resources that can assist you in getting back on track.

Understanding IRS Back Taxes

Paying back taxes is a common issue faced by many individuals who seek financial counseling. And no wonder – according to a January 2024 article by The Wall Street Journal, approximately 18.6 million individual taxpayers owe the IRS in back taxes. So, if you're struggling with back taxes, you are definitely not alone.  

Tax Act states that the most common reasons for owing back taxes include insufficient withholding, extra income, self-employment tax, life changes, and tax code changes. This means there's plenty of room for mistakes when filing your taxes.

If you're in the camp of Back Tax Repayment, know that you're not alone. Not only are many other taxpayers in the same camp as you but there are resources out there to support you in your journey of paying back your taxes.

Common Reasons for Owing Back Taxes

First, let's lay out the common reasons for owing back taxes. Some may not be so obvious.

Insufficient withholding is a very common reason why individuals end up owing back taxes. If you don't have enough taxes withheld from your paycheck throughout the year, you may owe a significant amount when it's time to file your tax return. If you consistently owe taxes each year, you may need to updated your withholding. 

Extra income, such as freelance work or rental income, can also result in owing back taxes. It's important to report all sources of income to the IRS and pay the necessary taxes.

Self-employment tax is another common factor contributing to back taxes. Self-employed individuals are responsible for paying both the employer and employee portions of Social Security and Medicare taxes. It might be helpful for you to seek professional advice on the best designation for your company in order to maximize your tax savings each year.

Life changes, such as getting married, having children, or starting a new job, can affect your tax situation. Failing to update your withholding or make estimated tax payments can lead to owing back taxes.

Changes in the tax code can also catch taxpayers off guard and result in owing back taxes. This particular reason gets me so red in the face... The complexity of the tax code and the frequency of changes makes it extremely difficult for the average taxpayer to fully understand and comply with their tax obligations. This puts them at a deep disadvantage and makes for a higher likelihood of owing back taxes or not taking advantage of the latest credits or deductions.

Options for Resolving Back Taxes

If you owe back taxes to the IRS, don't despair! There are several options available to help you resolve your tax debt.

If you have savings set aside in an emergency fund, I'd suggest looking their first and foremost. Do you have extra cash to spare to pay down back taxes? Great! How do you know if you can do this? You must first see if you'll still have a sizable emergency fund afterwards. If that's a no, move on to the next option and keep your emergency fund in tact.

Another option is to set up a payment plan with the IRS, also known as an installment agreement, where you can pay off your tax debt in monthly installments. This can be the most effective way to pay back taxes without having to dip into too much of your everyday spending or savings.

If your tax bill is too bloated for you to handle, another option is to negotiate an Offer in Compromise (OIC) with the IRS. An OIC allows you to settle your tax debt for less than the full amount owed if you can demonstrate that paying the full amount would cause financial hardship.

You may also be eligible for penalty abatement, which reduces or eliminates the penalties associated with your tax debt. This option is available if you can show reasonable cause for your failure to pay or file taxes on time.

In some cases, the IRS may place a temporary hold on collection activities if you're facing financial hardship. This is known as Currently Not Collectible status.

It's important to consult with a tax professional or seek financial counseling to determine the best option for resolving your back taxes.

Benefits of Seeking Professional Help

If you have the privilege of being able to afford a tax attorney, whose job it is to stay up to date with the latest tax code changes. They can help you explore all available options for resolving your tax debt and ensure that you understand the potential consequences of each option. They can also help you minimize penalties and interest charges.

There are many who may not have the resources to afford to hire a tax attorney. Thankfully, an affordable option would be to work with a financial counselor who can help you build a reasonable debt repayment plan that takes into account your financial capacity and the various options that may be available to you. Many also offer financial advocacy, where they join you on calls with the IRS to assist in discussing your situation and exploring your options.

Tips for Avoiding Future Tax Issues

To avoid future tax issues, it's important to stay organized and keep accurate records of your income and expenses. This will make it easier to report your income accurately and claim any deductions or credits you're eligible for. Using a budgeting app or tracking your spending accurately on a spreadsheet satisfies this task very easily.

Reviewing your withholding periodically can help ensure that you're having the appropriate amount of taxes withheld from your paycheck. Use the IRS withholding calculator to determine if you need to adjust your withholding and consult with your HR department to make the change.

If you have self-employment income, make estimated tax payments throughout the year to avoid a large tax bill at the end of the year. Consult with a tax professional to determine the appropriate amount to pay. Everlance has a handy 1099 Tax Calculator that estimates how much you'll likely pay according to your annual income and where you live. It breaks down what you're likely to owe in federal taxes, state taxes, and self-employment taxes. It's a great starting point.

Stay informed about changes in the tax code that may affect your tax liability. The IRS provides resources and updates on their website to help taxpayers stay informed.

Consider seeking professional help or financial counseling to ensure that you understand your tax obligations and are taking the necessary steps to comply with the tax laws. 

If you need help filing your taxes for the next tax season, there are resources such as VITA – Volunteer Income Tax Assistance – a free service provided by the IRS to assist in filing taxes for people who generally make $64,000 or less, persons with disabilities; and limited English-speaking taxpayers. Check your local United Way chapter to find your VITA program. YAS to community service!

Quick Soap Box: Taxes Seem Designed to Punish the Average Taxpayer

Taxes should be simple, straightforward, and transparent – the way that we pay them and the way that our tax dollars are used. After all, our tax dollars fund the government and its obligations, and we as taxpayers all deserve to know how to pay them and know what our taxes are being used for.

Is transparency really that hard? It's not and it really shouldn't be. Which is the crux of my quick soap box, in closing: the many layers it takes to understand our tax system seem to be designed to punish communities who lack financial resources and deep financial knowledge: folks who are low- or middle-income who cannot afford a tax professional, immigrants and their families where English and our complicated financial system is not their first language. 

The complexity of our tax code is endlessly frustrating, and it changes each year. It's so unreasonable to expect the average taxpayer to stay on top of the latest changes! And it's unfair that only those with financial resources can afford a tax attorney whose job it is to keep abreast of the tax code – and to find loopholes to avoid taxes in the first place. (Don't  get me started on the existence of tax loopholes!)

I believe that our tax code has a lot of work to do in making it more accessible to the average taxpayer, myself included. Will it ever be possible for our tax system to be simple? Not likely. But could we make the taxpaying system more accessible? Yes. We have a long way to go, but I have faith thanks to the many organizations who continue to serve those in need.