When Your Past Year Taxes Catch Up With You

It's the moment you've been dreading: you missed filing your taxes one year -- maybe you didn't have the money, maybe you didn't have the proper documents, maybe you just ran out of time -- and now the IRS is after you. When you miss filing, they aren't happy. They demand full payment of your past year taxes, plus fees and fines, and the whole sum accumulates interest at an alarming clip. You might be tempted to panic, but there's a better way.

First of all, remember that the IRS only tries to scare people when they can be scared into cooperating. When trying to collect on past year taxes, the IRS can spend a lot of money following leads, investigating records, and chasing people down. Or they can convince people to pay their past year taxes voluntarily. Usually, the latter course is a better one for everyone involved; you get to stop worrying about the huge and growing tax debt, and the IRS gets their money witha lot less hassle.

What does the IRS do when you get in touch with them? The first change they make is to the interest rates you're charged. Instead of paying 1% per month, your rates go down to .25% per month. In other words, they go from more than you'd pay on a large personal loan to less than you'd pay on your mortgage. That alone is a good reason to deal with your past year taxes, but the IRS offers something else, too. While you're not paying, they will occasionally tack on fees related to the delinquency. Those fees add up over time -- until you agree to pay, at which point they stop.

Agreeing to pay your past year taxes doesn't mean having to pay in a lump sum. The IRS often agrees to let you pay your past year taxes over a period of months, giving you a chance to catch your breath financially and get ready to pay the full amount. While it can be intimidating to have to pay up even over a few months, the IRS is generally not a creditor you want to have.
Paying your past year taxes with another form of debt, while not a good long-term strategy, is at least a viable stopgap. For example, if you can borrow money at less than 12% per year, you'll save on the final amount by borrowing the money, paying the IRS, and then paying back the loan at less than the IRS rate.

The closer you get to a complicated financial transaction, the more likely it is that you'll want professional tax and accounting help. Your past year taxes started out as a simple problem (filing a form with a single government agency, writing a check -- or, more likely than you'd think, getting one), but has mushroomed into something larger. Adding more layers to the transaction can make your problems accumulate faster, too.

Overall, past year taxes are a solvable problem. They're just a problem that demands careful attention and a little information. If you're worried about your past year taxes, keep two things in mind: first, they compound when you don't deal with them. That interest is accumulating even when you're not paying attention, and those fines add up. But second, once you do start to solve things, your situation gets simpler, fast.