Whoops. You know how important taxes are and you know you must file them every year, yet you didn’t. Maybe you were on a three-month archaeology dig in Egypt last spring. Maybe you didn’t file in 2016 because you were in a car accident and landed yourself in the hospital. Or maybe you just procrastinated and missed filing altogether for a few years straight. Now, what do you do? How do you file those back taxes?
What are Back Taxes?
When you file a tax return, you submit paperwork that coincides with the payments you made the prior calendar year, which your employer took out of your paycheck. (If you are self-employed, you should have been paying your quarterly estimated taxes throughout the year.) The return settles up with the IRS and determines how much you actually owe.
This tells the IRS that you require a refund for overpayment because you took deductions, which lowered your taxable base. Or, the IRS will determine that you owe money due to an underpayment because your estimations or withholdings were off. If you failed to file your tax return, you still owe money. Even if you have a good excuse or if it was years ago, you owe the IRS. No matter what, it’s against the law not to pay.
The IRS can collect on taxes due for up to 10 years, so dust off that calculator and file those back taxes before the IRS garnishes your wages. If you prepared your tax returns but didn’t submit them because you didn’t have the money to pay, the bill will not just “go away.” Unfortunately, penalties and late fees can make your bill grow even more.
If you don’t file, the IRS will estimate what you owe and will eventually collect on your debt. Filing back taxes can allow you to take deductions and credits that the IRS would not otherwise account for, which lowers your overall debt liability. If you are owed a refund, you only have three years to file back taxes to claim that money. After those three years, any money due you is absorbed by the government. If you are owed a refund, there is no penalty for filing a late return. Getting the paperwork for back taxes filed even if you don’t have the money to pay all of the money you owe is important.
You can request additional time to pay, up to six months, or you can set up a payment plan or an offer in compromise, which allows you to settle for less than you owe.
How to File Back Taxes
The hard part about filing back taxes is tracking down the relevant paperwork. Comb through your files, request your old W-2s from your employer or request copies of old 1099s and W-2s from the IRS by submitting form 4506-T and check box 8.
Method 1: Use Tax Software
If you want to tackle filing your back taxes by yourself, choose a reputable tax software company to assist you. Since tax laws change year to year, you have to file back taxes based on the laws that were relevant for that year and use that year's forms. TurboTax and TaxAct offer old software versions on each website, which allows you to easily walk through the same user-friendly software tailored for that tax year. You’ll fill out the forms online just the same as if you were completing your current year returns, which you should complete before filing your back taxes.
Method 2. Hire a Tax Professional
If you’re not interested in using tax software, hiring a tax professional to assist you in filing back taxes can be a wise choice, especially if your back taxes are older than 2015. You can download older tax forms from the IRS website but need to be knowledgeable about tax law changes and available deductions and credits for prior years. A professional can help you navigate the web of changes and paperwork and can advise you on what to do if you need to request more information from the IRS, cannot pay your taxes or if you get audited.
Don't Forget to File State Back Taxes
You’re also legally required to file state taxes and pay for them annually, even if you are late. Just as with federal taxes, you may be able to file prior year state taxes via tax software or through the state website e-filing system, but those will usually be available for only the most recent years. If you have older state taxes due, get a tax professional to assist you to ensure that your back taxes get filed correctly. If you file your federal back taxes but still owe state taxes, the state can garnish any federal tax refunds owed to you, so file those state taxes alongside your federal returns.
Final Thoughts
You can’t escape back taxes, but there are a few different methods you can use to get them taken care of. Make sure you pick the best for your situation. If you missed last year’s return, you can easily file it yourself using reputable tax software. If you owe back taxes from more than three years ago or if you need expert guidance, seek the help of a tax professional to walk you through changes to tax laws from prior years and get your back taxes filed professionally.
Related content: How to File Late Taxes