Do I have to pay taxes on money I'm using to pay back taxes from previous year?

Wait so if I'm paying penalties to the IRS for late payment, I can actually deduct those on next year's taxes? That seems weird that they'd let you deduct the penalties they charged you. Is there a limit to how much you can deduct?

Yes, it is a bit counterintuitive! You can deduct the interest you pay on your federal tax debt as an itemized deduction on Schedule A under "Interest You Paid." However, there's an important distinction - while the interest can be deducted, the penalties themselves generally cannot be deducted. There's no specific limit to how much interest you can deduct, but remember that you'd need to itemize your deductions rather than taking the standard deduction for this to benefit you. For many taxpayers, the standard deduction ($13,850 for single filers in 2023, increasing for 2024) is higher than their total itemized deductions would be.

How exactly does this work? Do I just upload my previous returns and it tells me what to do? I'm hesitant to share my tax docs with random websites.

Sounds interesting but isn't this just what a normal CPA would tell you? Why pay for some fancy AI tool when regular tax advice is available?

You upload your tax documents and the system analyzes them to show you personalized strategies for your situation. They use bank-level encryption, and you can actually delete your docs after analysis if privacy is a concern. It's not just for viewing your docs - it creates specific strategies for minimizing future tax impact when dealing with back taxes. Regular tax advice is definitely valuable, but most CPAs charge $200+ per hour and often don't specialize in back tax optimization. This tool costs way less than a single CPA session and provides detailed simulations showing how different payment strategies affect your future tax obligations. It's more about seeing the full picture of your options than just getting generic advice.

How does this even work? Sounds like a scam tbh. The IRS phone system is notoriously terrible.

No way this actually works. Even if you do get through, the IRS agents rarely have the authority to actually help with complex situations. I'll stick to sending certified mail and waiting 6 months for a response like the rest of us tax peasants lol.

It uses a combination of automated dialing technology and actual people who monitor the calls. When you sign up, you provide your phone number and what IRS department you need to reach. Their system handles the calling and navigating the IRS phone tree, then when an actual human IRS agent answers, they connect you directly. It's basically someone else waiting on hold for you. Honestly, I was surprised too, but speaking with an actual IRS agent was super helpful. The agent I talked to set up my installment agreement right over the phone and even helped me understand which forms I needed to complete for my specific situation. It saved me from falling further behind and accumulating more penalties. They definitely have the authority to set up payment plans - that's a standard service they offer.

I tried that route. Unless you're basically destitute, they rarely accept OICs. They'll look at your income potential over several years, so making $67k won't help. They also look at assets, bank accounts, retirement funds, etc. It's a really intensive process with tons of documentation required.

That's good to know. I've seen those "settle your tax debt for pennies on the dollar" ads and wondered if they were legit or just trying to collect fees for filing paperwork that gets rejected anyway. From what you're describing, it sounds like most people wouldn't qualify unless they're in really dire financial situations. I guess the IRS payment plan is probably the more realistic option for most folks.

This is the best advice here tbh. I made this mistake and ended up paying an extra $4,000 in penalties because I didn't file since I couldn't pay. The IRS is actually pretty reasonable about payment plans if you're proactive and communicate with them.

Thanks for confirming! Yeah, it's something I wish I'd known earlier. I put off filing for almost 8 months because I couldn't pay what I owed, and those failure-to-file penalties absolutely destroyed me financially. I've found that the IRS is surprisingly willing to work with people on payment plans. Their interest rates aren't even that bad compared to credit cards or personal loans. The key is staying in communication and never ignoring notices.