To the common layman, legal and financial mumbo jumbo might as well be written in Greek. Words which you would probably not use for years in verbal conversations are found in tax forms and other such documents. You would be forgiven if you wished they would just put things in plain English sometimes. But this terminology is here to stay and to understand and use them is a necessary evil. Therefore, in this article we cover three basic tax terms and what they mean. Click here to watch or read more information on IRS Back Taxes.
1. Back Taxes
As you know, tax returns are to be filed every year. Skipping a year means you have contravened the tax laws and you are liable for a penalty. But even a penalty does not absolve you from filing in your taxes for the year your have skipped. When you file your taxes for a year you have skipped, you are filing your back taxes. Obviously, back taxes may involve more than one tax year. Filing back taxes does not remove any tax breaks or deductibles you may be entitled to. So if you are entitled to any credit for that year, you can still claim them even though you are applying for it late.
2. Tax Lien
The term ‘lien’ is used in other financial sectors, not just in relation to your taxes. You may come across a bank lien or real estate lien, for example. The term lien basically refers to a right that the lien holder has over the item the lien is placed on. Suppose you have a house but you owe the IRS money in back taxes. The IRS has the right to go to court and obtain a tax lien on your house so that you cannot sell or refinance the house until your back taxes have been paid up. You would also need the IRS’ approval before attempting to sell the house. And if you do sell it, all the proceeds must be utilized to pay your back taxes plus interests and penalties first before being used for any other purposes.
Although tax laws vary from state to state, generally if the taxes are not paid for a period of time, the lien authorizes the IRS to either seize the property, foreclose or sell it.
3. Assessed Income Tax
If you do not submit your tax returns for any particular year, the IRS will assess your taxes for you based on your tax returns of previous years on file. Without any information to the contrary, the IRS will assume you owe the maximum amount of taxes without any tax relief allowed. This will be the tax amount imposed on you to pay unless you file your returns in the form of back taxes.