Back Taxes– or tax debt – are unpaid taxes assessed against a taxpayer by a level of government (i.e. Federal, State, Local) that are past due. Internal Revenue Service (IRS) back taxes are past due federal income taxes. The IRS assesses back taxes one of three ways.
First, the back taxes are typically the result of a filed but unpaid federal income tax return. This means that a taxpayer filed his or her federal income tax return, but he or she failed to subsequently pay the tax due by the deadline (typically, April 15). Once the IRS processes the return and assesses the balance due, the taxpayer will now owe IRS back taxes – plus an additional “Failure to Pay” Penalty.
Second, the back taxes can be assessed against a filed and paid federal income tax return, when the return failed to account for all income earned during the previous year. This means that the taxpayer prepared, filed, and paid his or her federal income tax return. However, when preparing the federal income tax return, the taxpayer failed to include all of the income he or she earned throughout the year. Remember, the IRS receives records from all employers and financial institutions showing all amounts paid to taxpayers throughout the year (i.e. Form W-2, Form 1099, etc.). If the IRS records do not match that of what the taxpayer claimed on the return, then the taxpayer may face an underreporting issue. If the taxpayer does not promptly account for the disparity in records, the IRS can amend the taxpayers filed return to account for unreported or underreported income, and assess back taxes against the taxpayers.
Third, back taxes can occur even if a taxpayer does not file a tax return. If a taxpayer fails to file a tax return, the IRS may file a return on his or her behalf. These are called Substitute for Returns. The IRS will often prepare the return in a light least favorable to the taxpayer. Often the substitute return reflects a much higher tax than what the taxpayer would have been assessed, had the taxpayer filed their own return. Once that tax is assessed and remains unpaid, it becomes back taxes.
Regardless of how the back taxes are assessed, the IRS has ten (10) years from the date of assessment to collect the back taxes. The date to which the IRS has to collect any particular taxpayer’s past due taxes for any particular tax year is called the Collection Statute Expiration Date, or CSED.
It is in your best interest to speak with a tax professional to go over all of the options that are available to resolve your IRS back taxes.