What Are Back Taxes?

Back taxes are taxes that have been partially or fully unpaid in the year that they were due. Taxpayers can have unpaid back taxes at the federal, state and/or local levels. Back taxes accumulate interest and penalties on a regular basis.

Key Takeaways

  • Back taxes are taxes that are due to be paid but have not been.
  • Back taxes are subject to penalties and interest and must be paid back in a timely manner.
  • If back taxes remain unpaid, serious legal action can take place including tax liens, wage garnishment, or prison time.

Understanding Back Taxes

Back taxes refer to taxes owed from a prior year. A taxpayer may be behind in paying taxes for intentional or unintentional reasons. Some of these reasons include—filing a return and failing to pay the tax liability; failing to report all income earned during the tax year, and; neglecting to file a tax return. If the taxpayer doesn't file a tax return, the failure to file penalty is 0.5% of the amount due.

That penalty applies every month or part of a month until the tax is paid in full or until the penalty reaches 25% of the tax owed. In addition, the IRS charges interest on the unpaid amount. The interest rate charged by the IRS changes quarterly. As of the third quarter of 2020, the interest rate is 3%. As the total tax debt increases each month due to penalties and interest, over time, it can grow into a significant amount.

Unpaid back taxes can be a serious issue for many taxpayers who don't have the means to pay them. Depending upon the circumstances, the government may take one of many strategies to deal with back taxes, such as pressing charges, demanding that the taxpayer pay immediately, or sometimes offering a voluntary disclosure program that helps avoid criminal charges and allows a variety of payment options. Failure to pay taxes can also involve imprisonment.

Consequences for Unpaid Back Taxes

In some cases, the IRS will seize property, seize assets, or place liens on the property. The IRS may place a federal tax lien to inform other creditors of the taxing authority’s legal right to a taxpayer’s assets and property. 

The IRS also has the power to garnish a taxpayer’s wages and to levy their financial accounts, seizing up to the total amount of taxes owed. If the taxes remain unpaid, the tax authority can use a tax levy to legally seize the taxpayer's assets (such as bank accounts, investment accounts, automobiles, and real property) in order to collect the money it is owed. While a lien secures the government’s interest or claims in an individual’s or business’ property when the tax debt remains unpaid, a levy actually permits the government to seize and sell the property in order to pay the tax debt. 

In 2016, the IRS turned over the collection of unpaid back taxes to a private collection agency.  However, taxpayers who lack the means to repay taxes may often negotiate a lesser settlement via an Offer in Compromise with the IRS either directly or through a tax attorney.

Tax Liens

A tax lien is a legal claim by a government entity against a noncompliant taxpayer's assets. Tax liens are a last resort to force an individual or business to pay back taxes.

A government can place a tax lien on a property if the property owner is not making his or her property tax payments or is owing on income taxes. In other words, federal and state governments may place tax liens for unpaid income taxes, while local governments may place tax liens for unpaid local income taxes or property taxes. The lien does not mean that the asset will be sold. Instead, it ensures that the tax authority gets first to claim over other creditors vying for the individual’s or business’ property.

In addition, a tax lien prevents the taxpayer from selling or refinancing the assets to which liens have been attached. The lien remains in place until the tax liability is paid off or the statute of limitations on the debt expires.

If the taxes remain unpaid, the tax authority can use a tax levy to legally seize the taxpayer's assets (such as bank accounts, investment accounts, automobiles, and real property) in order to collect the money it is owed. While a lien secures the government’s interest or claims in an individual’s or business’ property when the tax debt remains unpaid, a levy actually permits the government to seize and sell the property in order to pay the tax debt.