What to Do When You Owe Back Taxes

Right after I decided not to watch the election counts yesterday and while I was still reeling from finding out that a friend may end up in federal prison, another friend called because she had a client who needed to file some back taxes.  I still get calls all the time for help with all kinds of things (helping people was what I did in my previous life) so this is nothing new.  I thought that my "things that are going to shock me today" quota had been used up yesterday but apparently it hadn't been because when I asked what forms the person needed, she said "all of them".  For the last six years.  Yikes.
So here is the spiel I gave her about taxes:

• Always file your taxes on time each year even if you can't pay them.  There is a financial penalty for paying your taxes late but there is also a penalty for not filing at all so at least you can avoid one penalty by filing on time.
• If you can't file on time for whatever reason, file for an extension then be sure to file your taxes before the extension expires.
• You can do your own taxes by going to www.irs.gov and pulling up the forms and instruction you need for this past year and for previous years.
• You can also do your taxes online which is even easier because it takes away the need to do all of the calculating.  Just enter your information and it is all figured out for you (I always do my taxes online at H & R Block).  I'm not sure if you can file back taxes through such a website.
• If you are totally overwhelmed, a good tax preparer can be totally worth the money.
• It is sooo much easier when you keep good records.  And this doesn't have to be difficult.  Even a simple Excel spreadsheet where you record expenses and income can be super helpful when it comes time to prepare your taxes.
• So once you have filed your taxes and can't afford to pay what you owe, now what?  After you file, give the IRS a couple of weeks to process your taxes and then give them a call and ask to make payment arrangement.  The IRS does this for millions of people; they want to help you be able to pay your taxes so they are pretty good about making payment arrangements that you can afford.
• If you are completely buried in back taxes owed there is the option to make an offer in compromise or to have the debt totally written off.  I have heard that people have filed for both OICs and write-offs themselves but I would probably recommend having a professional (tax accountant/attorney) do this for you.
• What happens if you don't file or don't pay?  For starters the IRS probably won't forget about you if they have any documentation to show that you have earned money and not paid your taxes (they get the info from your employer who files their own taxes which show that they paid you).  It's a bit more tricky if you are earning money under the table but it isn't impossible for the IRS to figure this out.  Once they calculate how much you owe, they can garnish your wages as well as any other future income you may receive   You can even end up in jail (Al Capone got away with quite a bit of nastiness but he ended up in prison for tax evasion...the IRS doesn't mess around when it comes to getting their money!).

Hopefully the client will get their whole tax mess straightened out.  It can seem pretty overwhelming when one missed tax filing snowballs into a multi-year mess but it is totally worth it to get the mess cleaned up as soon as possible.