How to Pay and File Federal Back Taxes

How to Pay and File Federal Back Taxes

With a lackluster economy and high unemployment, many taxpayers are facing tax bills they cannot pay which can be brought on in many ways. In any event, get a better understanding of why and how to file back taxes. More importantly, understand the various payment agreements available in order to pay back taxes owed and get into compliance with the IRS.

If you need to pay back taxes there are many ways that you can get this done. Some are more difficult than others, but in the long run you should be able to work something out with the IRS.  The last thing you want to do is follow a course of inaction because it will only lead to additional penalties, interest, and levies (seizure of your property). IRS Commissioner, Doug Schulman announced this year that the IRS will be more lenient on taxpayers facing economic difficulties because the troubled US economy has brought on high unemployment.

Before you can figure a payment plan or setltement with the IRS you need to file your taxes first. In some cases, the IRS (if it has been years) may have filed a tax return for you which is called "Substitute for Return" or SFR. This does not mean that you should not file--filing will allow you to maximize any credits or deductions for that given year. Here is a short summary of how to do this:

  1. Collect Income Documentation – This includes 1099 documents, W-2s, and so on. If you cannot find these documents you can contact your former employer and/or financial institutions for this information. In the event you cannot find any of this information you can contact the IRS or you can use FORM 4852 to estimate your earnings.
  2. Complete Your 1040 Form - If you are filing for 2008, you need to use the 1040 form from 2008. This is because each year the tax code slightly changes with regards to deduction amounts, credits, and credit amounts. In many cases you can use a tax software program (by purchasing the edition for that year) or hire a professional to help you with this process.
  3. Send Your Tax Return Away – Unfortunately, with Federal past due tax returns you can not eFile them. Therefore, you will need to mail your tax return for the given year you missed to the address for filing which can be found on The specific state you live in will determine which address to mail the return to. If you are working with a tax professional (highly recommended) then they will be able to help you with where your back tax return should be sent.

After your file your back taxes you will know what your tax liability situation looks like. You may be in a situation where you have filed your taxes, and know how much you owe, but you cannot pay in full. In either case, you will have a few options in order to pay back taxes or get into compliance with the IRS.

  1. IRS Installment Agreement - If you can pay back the IRS over a few years via monthly payments then you may want to look at an IRS Installment Agreement. There are different IRS Installment Agreements based on the total amount you owe:
    • Guaranteed Installment Agreement - If you owe the IRS $10,000 dollars or less you automatically will be approved for this type of payment plan. This payment plan will last 3 years and will require a monthly payment amount which is calculated by taking the total amount you owe and dividing it by 30 (for 30 months). The remaining 6 months is left for interest. You can apply for this using the IRS’s OPA or Online Payment Agreement Application.
    • Streamlined Installment Agreement - If you owe the IRS more than $10,000  but less than $25,000 you want to apply for this type of Installment Agreement. It is coined "streamlined" because no financial disclosure is required. This payment plan can last 5 years and the minimum monthly payment is calculated by taking the total amount you owe and dividing it by 50 (for 50 months). Fill out form 9465 and send it to the IRS with your tax return. Make sure to include the user fee or application with your first month’s payment.
    • Verified Financial Installment Agreement – If you owe over $25,000 you will want to look to apply for this type of Installment Agreement. It is “verified” because the IRS will need you to disclose your financial assets, income, liabilities and monthly expenses on a Collection Information Statement (Form 433A). It is much more difficult to get this accepted by the IRS versus the other former Installment Agreements and therefore you should work with a CPA, tax firm, tax attorney, or Enrolled Agent. In many cases, the IRS will require that you liquidate assets before this type of agreement be accepted. To figure out the minimum monthly payment again you take the total amount you owe and divide it by 50.
  2. Partial Payment Installment Agreement - If you cannot make the minimum monthly payments on any of the Installment Agreements above and you owe at least $10,000 dollars in IRS debt,  you may want to look to apply for a Partial Payment Installment Agreement. This will allow you to pay back your tax debts over time but at a discount.  The way it works is as you pay off your taxes, a portion of  your debt falls off due to the Statue of Collections. This agreement is not easy to obtain, and like the Verified Installment Agreement it is best to work with a tax professional.
  3. Offer In Compromise – Last but not least, an Offer In Compromise is another way to pay back IRS taxes owed but you will be only satisfying a portion of your outstanding liabilities. In order for this to be accepted by the IRS you need to prove one of the following: there is doubt in the amount you owe, there is doubt the IRS will ever get the full amount from you, or there is reason to be collecting the full amount from you would be unfair or cause financial hardship. You may see radio ads and mass commercials on an Offer In Compromise, but buyer beware. This is payment agreement is possible, but keep in mind that the IRS only accepts 10 to 15 percent of offers that they receive.

In summary, the most important thing you can do is file your taxes becasue if you fail to do so, you cannot work out a payment at all with the IRS. More importantly, in considering your options above, realize that unless your financial situation is dire, an IRS Installment Agreement is in your best course of action in terms of paying back taxes owed.


Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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