227 - What if you have back tax?
On today's episode of the podcast I walk you through what to do if you're faced with back taxes (don't worry, you aren't alone). If you don't have back taxes, I recommend sticking around for this episode to learn what to do if this happens to you in the future.
I used to sell an online course called Unf*ck Your Biz and we had a full module called Unf*ck It where we covered back taxes and business formation mistakes. I often hear about back taxes when I talk about them. I took this info and created Unf*ck Your Tax which is within Profit Rx.
First, let's check on how you're doing on your taxes. Which category would you say you fall into?
1. I'm absolutely crushing it
2. I'm doing pretty ok
3. I'm paying quarterly taxes and keeping my books up-to-date but my systems could likely be improved
4. I'm not paying quarterly taxes but I've paid on time each year and don't owe any back taxes
5. My tax filings are up-to-date and I'm on a payment plan for back taxes I already have
6. My tax filings are up-to-date, I owe back taxes, and I don't have a solid plan for them
7. I'm behind on my tax filings, meaning you haven't done your returns yet so you aren't sure if you owe
Unf*ck Your Tax is designed mainly for those who answered 5, 6, or 7. If you answered 1-4 you probably don't need to go through this bonus program. If you answered 5, you will need to skim through Unf*ck Your Tax to see if you're on the right path. If you answered 6, Unf*ck Your Tax will be your new best friend. If you're 7, skim through the course, then go through the Tax Season Playbook in Profit Rx to file your taxes. If you end up with a balance then come back to Unf*ck Your Tax.
The IRS has a thorough Taxpayer Roadmap framework. It's a very complex flowchart but is quite handy. The steps on the flowchart look like a stop on a metro line and are all clickable with more information and details you can zoom in on.
For example, if you got a letter from the IRS, let's say you get a CP501, you can type it into the search box on the Roadmap and it will tell you where you fall and how and if you need to respond to the letter. In my program, I made a simplified version of this flowchart which you can view here.
To briefly explain it:
First, you prepare your tax return and it gets processed. If they process it and there's no issues then you get your refund. If you owe money and they process it and there's no issues, then you pay them and that's the end. If something pops up in processing you can either go straight to collections or to exam. Collection is where you will be sent if they have something that is very automated. An example of this would be someone issued you a 1099 and you did not report it, and the IRS says we estimate your additional tax to be $X and ti goes to collections to collect your money. If you did something on your return that looks fishy and they want to look into it, that's when you go to exam (another term for audit).
There are three levels of audit:
1. Correspondence audit - Back and forth letters you have to send.
2. Office visit - You visit an IRS office.
3. Field audit - The most serious, they come to your office/home. This only tends to happen in more serious cases.
If they determine on audit you took a deduction you weren't allowed to take, they'd say you owe us $X. If you agree with them but don't pay them right away they'd send you to collection. If you don't agree with them, you can appeal. They can accept it, or reject it in which case you can file an appeal in tax court if you choose. If you agree on the appeal but don't pay it you go to collection. A lot of are not going to end up being audited, but we might end up going through collections if we are not saving and paying quarterly taxes.
To give you a brief overview on collection options:
- Offer and compromise - This allows you to pay less than the total tax you owe in installments. There are income qualifications for this and future qualifications like filing on time. Their goal is to collect as much as they reasonably can. You apply through an agency who analyzes the most they can expect to collect in a reasonable time and are asked future income and expenses. If you owe a good chunk of tax debt but just don't have money, this would be an option.
- Non-collectible - Asking for financial hardship if you can't make any tax payments right now
- Bankruptcy - An option if you have a lot of different financial issues happening. I am not a bankruptcy attorney.
- Innocent Spouse Relief - If you want to claim that your spouse is to blame for your tax issues. This typically is only granted in circumstances of abuse, areas where you are restricted from the finances.
- Installment Agreement - This is the most common option. The IRS allows us to pay in installments if you owe up to a certain amount. Inside Unf*ck Your Tax I have the back tax strategy guide to help you figure out how much you can put toward back tax while putting money toward your current quarterly taxes.