Updated September 24, 2021

They say an elephant never forgets—and neither does the IRS. If you have unpaid taxes, you will eventually need to file them. The good news is that the matter of filing back taxes is not as onerous or burdensome as you might think.

How to File Back Taxes

1. Gather Tax Documents
2. Find IRS Tax Forms
3. Prepare Back Taxes
4. Elect a Payment Plan

It was the man whose face is on the hundred-dollar bill that said, “Nothing is certain, save for death and taxes” (Benjamin Franklin). But income tax is actually a relatively new invention in American history. Abraham Lincoln was the first president to tax incomes above a certain threshold, and in 1913 income tax was signed into law by Woodrow Wilson.

Whatever you may think of its constitutionality, income tax is something that every taxpayer has to contend with, every tax season. If you missed a filing deadline and moved on without paying the taxes you might have owed, you may need to pay back taxes.

What are Back Taxes?

Back taxes are taxes you owe for any years when you did not file a tax return. There could be any number of reasons why you didn’t file taxes that year.

If you are employed, your taxes have already been taken from your wages, but you still need to file your taxes, especially if you want a tax refund. If you are self-employed or own your own business (as a sole proprietor, LLC, or C-corp), you need to prepare a tax return with a Form 1040 documenting your gross income, business expenses, and net income. If there was a year you did not do that—because you forgot, you were out of the country, or wanted to avoid paying taxes—you will eventually need to file your back taxes. It’s better to do that sooner rather than later. Additionally, you may find that you qualify for a tax refund, which you would forfeit if you did not file your taxes within three years of missing the deadline.

How to File Back Taxes

If you need to file back taxes, you’ll want to follow these four steps:

1. Gather Tax Documents

First you will want to gather all documents related to filing your taxes, such as a W2 if you are employed, or a Form 1090-MISC if you are an independent contractor. Keep in mind that many businesses might not bother keeping paperwork older than seven years. If you are running your own business, you will want to assemble any invoices or receipts for goods and services you can write off as business expenses.

2. Find IRS Tax Forms

You will need to use the appropriate forms for the year you’re filing back taxes, so you can’t (for example) use a 1040 Schedule C from 2019 for 2020. If you are missing any forms, you can request them from the IRS with Form 4506-T (Request for Transcript of Tax Return). You will need to mail your back taxes in because you can’t file them electronically. However, you can use software to prepare back taxes.

3. Prepare Back Taxes

It’s always helpful to work with an accountant or tax advisor who can help you learn how to pay less taxes. You might have forgotten a few items you could write off, such as a business expense or depreciation. A tax advisor can help you brainstorm some of the potential tax write offs and tax credits for which you may be eligible.

If you have questions about back taxes and the most strategic ways to file, schedule an appointment with an Anderson Advisor’s tax expert today! We are a full-service tax firm that specializes in working with businesses and investors. 

4. Elect a Payment Plan

You can certainly pay all the back taxes you owe at once using the direct pay feature of the IRS website. Note that your credit card company may charge additional fees for making such a payment with a credit card. However, it’s important to note that you don’t have to pay everything at once. You can create an installment agreement giving you 72 months (that’s six years) to pay your back taxes, as long as you owe less than $50k. If you owe $10k or less, there is a good chance the IRS will allow you to set up a repayment plan. You can also explore the possibility of an offer in compromise, if you can demonstrate an inability to repay the full amount. More often than not, you will need the assistance of a professional, such as a tax lawyer, to pursue this option.

How Long Do You Have to File Back Taxes?

There is actually no statute of limitations in regards to how long you have to file back taxes—the IRS is happy to collect what they are owed. But if you want to claim a tax refund for yourself, you won’t be able to collect anything older than three years. Additionally, the IRS may seek legal action against you after six years, so it’s best to be proactive and file your back taxes.

Even if they hold off on legal action, they will take it upon themselves to prepare your tax return for those missing years—and they won’t bother to make any tax deductions or tax write offs or claim any tax credits. Because of that, you could end up paying a lot more than you really owe, or at least what you would have paid if you had prepared your taxes yourself.

The IRS will provide you some notice before filing this rudimentary tax return or substitute tax return, sending you Notice of Deficiency CP3219N within a 90-day window to either prepare the back taxes yourself or file a petition in tax court.

If you continue to avoid paying an unpaid tax, Uncle Sam has a few surprisingly far-reaching tricks up his sleeve. Wage garnishment can remove a portion of what you owe from each and every paycheck until your back taxes are paid up. In addition to IRS penalties levied against you, the IRS can actually take what’s owed right out of your bank account. And, in rare instances, some of the 2,200 IRS agents can actually show up and make an arrest. For a taxpayer with accidentally unfiled tax returns or a late tax return, this ultimate solution is most unlikely (in fact, impossible). But for those rare individuals—for instance, a narcotics kingpin with a money laundering business meant to cover illicit activities; owing millions of dollars in back taxes—an arrest is not out of the question. Otherwise, you do not need to be afraid of onerous penalties for unfiled returns or delinquent tax returns. The IRS is willing to work with you to make sure they get paid.

What Should You Do If You Owe Back Taxes?

If you owe back taxes, you should be proactive and set up an installment plan with the IRS to repay what you owe. If you aren’t proactive, you may face fines, fees, and a possible federal tax lien placed on your property. In many cases, fleeing the country will not help because many nations are willing to extradite individuals with a delinquent tax record back to the United States, and if said taxpayer attempts to set foot in the country again, they would likely be arrested in the airport (this likely does not apply to most taxpayers reading this article).

As a side note, the federal government has been known to use issues like unpaid taxes to prosecute individuals for whom they cannot convincingly prove to have engaged in criminal activity, such as the infamous Al Capone. And even more recently, under the Obama administration, the federal government faced criticism for using the IRS as a means for ensuring and arresting vocal political dissidents who violated laws in regards to campaign finance or tax law.

Even if you aren’t part of the mafia or a vocal opponent of the federal government, you shouldn’t risk the complications that can develop out of unpaid taxes, especially since the IRS is amenable to working with individual taxpayers with an outstanding tax debt. For most Americans, the IRS is not as scary as they sound.

Sometimes it helps to meet with a tax lawyer before you take any course of action. A tax attorney may advise you to just proceed with the tax resolution of paying your fine or fee (if applicable) and/or setting up a plan of monthly payments. Alternatively, they may see a reason to seek out a penalty abatement (that is, a removal of the fines, fees, and penalties while still paying the taxes), or even reach an offer in compromise with IRS. If they are an enrolled agent, they can even represent you before the IRS to discuss some sort of compromise between what you owe and what you feel you can afford to pay.

Are Back Taxes Public Record?

No, they are not. However, it’s important to realize this only relates to income tax. Unpaid property tax often does end up becoming public information because local or state governments often sell the rights to collect your tax debt to a third party in a tax lien auction. However, in terms of your federal income taxes, the IRS will not share that information except in certain circumstances, such as when it is requested by law enforcement with a valid court order, if a state taxing authority requests them in writing, and with the Social Security Administration—but only for the purposes of determining if you owe any FICA taxes.

The IRS may also give limited information to a party conducting an audit of your taxes under IRC Section 6103(k)(6), but that is extremely rare. And, of course, if you yourself authorize them to release your personal tax information using Form 8821 or Form 2848, they will. This issue is often in the news in regards to elected officials who are pressured to release their tax returns. According to tax law, they are not required to do so, though many do so voluntarily. Aside from that, however, leaking tax information about a private individual, even if they are an elected official, is a criminal offense. The tax professional who assists you in preparing taxes knows this, and will avoid any unscrupulous practices, such as releasing your personal information, unless the law compels them to do so or you give them permission.

Filing Back Taxes is Well Worth the Effort

You have more to gain than lose in terms of filing back taxes, especially since you can obtain a refundable tax credit within three years of a missed deadline. Even if you don’t, failing to file your taxes can result in fees, fines, and penalties that will eventually catch up with you. And even if you won’t owe any taxes, you should still file your back taxes, because tax returns are often needed to prove your income for everything from social programs to obtaining a loan.

If you are missing a tax document for a particular year, speak to a tax professional about filing back taxes so you can remain in good standing, avoid losing money to fees, fines, and IRS penalties, and even potentially claim a tax refund.

For more information about the latest business and investing tax issues, tune into our weekly Tax Tuesday Webinar. It’s a great opportunity to ask our tax experts questions about tax tips and opportunities.