If you’ve found yourself unable to pay your taxes, you know what a relief it is to get approved for an IRS installment agreement. Instead of facing levies, liens, or other collection actions, you can pay for your taxes over a period of up to 120 months. This is an excellent solution for the first year you need help, but what happens if you file your taxes the next year and once again are unable to pay what you owe? Can you start a second payment plan? Can you add the balance to your existing payment plan? Or are you in trouble? To get guidance now, contact our payment plan attorneys

Overview of Installment Agreements

The IRS has a number of payment options for those who are unable to pay their taxes in full. Those who can pay something but not everything may look into an Offer in Compromise, while those who genuinely cannot pay anything may be considered Currently Not Collectible. For those who just need a little extra time to pay their taxes, a short-term or long-term payment plan may be the best option.

Different Types of Installment Agreements

There are two main options available for individual taxpayers:

• Short-term payment plan: Taxpayers who owe less than $100,000 in taxes, penalties, and interest may go this route. You have up to 180 days to pay your past-due taxes before the IRS initiates collection actions.
• Long-term payment plan, also known as an installment agreement: If 180 days is not enough time to pay off your tax bill, an installment agreement may be the better option for you. Payments are due every month for up to 72 months; the payment plan may be shorter if you are able to pay more than the minimum each month.

The IRS has a few different subcategories of payment plans. For example, if you cannot pay within 72 months, you may be able to get a payment plan that lasts longer but only if you file a Collection Information Statement and pay off the tax debt by the Collection Statute Expiration Date.

You Can’t Have More Than One Installment Agreement at a Time

An IRS installment agreement can give you some breathing room in your budget, especially if you have a low monthly payment. However, it only accounts for current or past-due taxes. You also have to plan ahead for future tax years. If you have an installment agreement for $5,000 and then owe $5,000 again the next tax season, can you just sign up for two installment agreements?

Unfortunately, you cannot have two installment agreements with the IRS. The installment agreement is a legally binding agreement between you and the IRS, and accruing additional tax debt and letting it go past the due date actually puts you in violation of that contract. At that point, the IRS is free to terminate the payment plan and demand the total due in full. Note, though, that this is rarely their first step; they would prefer to come to an arrangement that fits your budget and allows them to collect what they are owed.

Financially, it makes sense that they do not allow multiple installment agreements for one taxpayer. If a taxpayer owes a substantial amount one year and does not make the necessary changes for the following tax years, it would be all too easy for installment agreements to snowball into a massive pile of debt that they cannot pay. A $100-per-month payment plan would turn into $200 per month the second year and so on, only slowing down as old balances dropped off. This is unsustainable, both for the IRS and for taxpayers.

This doesn’t mean, though, that you have no option but to pay your tax debt in full by April 15. You do have options that don’t involve levies, liens, or wage garnishment.

Rolling New Balances Into Your Current Installment Agreement

Instead of starting a second installment agreement, you may be able to amend your current installment agreement to include your newly owed taxes. Note that there is a fee of $10 to revise your payment plan online and a fee of $89 to revise it in person, over the phone, or by mail. For most people, this is quick and easy—and assuming your new tax debt still allows you to make minimum payments over the course of your payment plan, you may not even have to talk to anyone to get your payment plan approved.

Consolidating your tax debt into one installment agreement offers you numerous benefits. To start, you only have to keep track of one due date and outgoing payment each month. Additionally, the IRS is generally very flexible with its installment agreements. Remember, they would rather collect what you owe than have you default on your taxes completely. 

Even if your new balance makes your monthly payments impractical or unreasonable for your budget, you can ask the IRS to extend your repayment terms rather than force you to pay more than your budget can handle.

Please note that you must request an amendment for your installment agreement before your new tax debt is due. Once your new tax debt is past due, you are technically violating your installment agreement, and the IRS may take action to collect what you owe. This may make it more difficult for you to change your installment agreement in the future.

What If You Can’t Make the Payments on Your Installment Agreement?

If you’ve calculated your payments with the extended repayment options offered by the IRS and they are still unmanageable for your budget, it may be time to think about an Offer in Compromise. Too many taxpayers agree to an installment agreement they know they can’t afford, hoping to make it work until it’s paid off. 

This leaves you in a tough situation when unexpected bills arise, you have a medical emergency, or someone in your family suffers a job loss. At that point, falling behind in your installment agreement can result in default and collection actions against you (The IRS will send Notice CP523 to alert taxpayers in default of their installment agreement). It’s often better to accept from the beginning that an installment agreement is not in your best interests and consider an Offer in Compromise.

With an Offer in Compromise, you present an offer to the IRS. They consider this a last resort, so you should genuinely not be able to afford your new installment agreement before you make your offer. The IRS will consider a range of factors when deciding whether or not to accept your offer, including your overall ability to pay, equity in assets, income, and expenses. You can submit an Offer in Compromise with Form 433-A. Depending on what suits your financial situation, you may offer a lump sum payment or periodic payments.

Another option to explore is a partial payment plan. This allows you to make payments for the entire payment term, but ultimately you pay less than what you owe. The IRS generally offers this option to those whose income does not qualify them for a conventional installment agreement.

If your financial situation has changed dramatically and you can no longer afford either your installment agreement or the new taxes you owe, you could qualify for Currently Not Collectible status. This does not make the debt go away, but it does result in the IRS temporarily ceasing collection actions against you. This is a temporary solution, as the IRS will periodically request financial documents from you and restart collection activity when you are financially capable of paying both your tax debt and your living expenses.

If you aren’t certain which option is best for you, it’s a good time to talk to the tax attorneys at Damiens Law. We’ll take a look at your tax returns, your finances, and other documentation to help you decide on a path forward.

Planning for the Future: Making Sure You Don’t Need to Continue Adding to Your Installment Agreement

For most people, constantly adjusting their installment agreement to include new tax debt isn’t a viable option. This results in you paying unnecessary fees, and you always run the risk of having your amended installment agreement denied by the IRS. 

Once you have an installment agreement in place, it’s better to take a look at how you are currently managing your taxes and find ways to avoid incurring tax debt in the first place.

Change Your Withholdings

If you are conventionally employed at a W-2 job, it’s easy to change your tax withholdings with your employer and have more taxes taken out of your paycheck every pay period. You may want to start by looking at how much extra taxes you generally owe each year on top of what you already pay in. 

Divide that number by the amount of paychecks you have in one year, and consider having that extra amount withheld from each paycheck. It’s just a matter of filling out your W-4 and marking how much extra money you want withheld.

Make Estimated Tax Payments

Those who are self-employed, gig workers, or freelancers do not have the luxury of having taxes withheld from their paychecks. In this situation, it’s easy to spend the money on expenses as it comes in and plan on dealing with taxes later. Unfortunately, this type of financial management can leave you with a massive tax bill at the end of the year—as well as a penalty for not making estimated payments every quarter. 

If you fit into this category and you should be making estimated tax payments, actually making those payments can save you from an unexpected tax bill or penalties at the end of the year. The IRS makes it easy to figure out your estimated tax payments; Form 1040-ES calculates your estimated taxes. You can also use your prior tax returns as a starting point.

Note that paying estimated taxes doesn’t guarantee you won’t owe anything when taxes are due. You may still want to put extra money away as an extra cushion.

At Damiens Law, we understand how quickly tax problems and tax debt can spiral out of control, leaving you overwhelmed and uncertain of what you should do next. The moment you realize you’re starting to lose control, we recommend talking to a tax attorney. We are here to help, and our in-depth knowledge of tax laws and tax solutions gives us the expertise needed to solve your unique problem. Find out how we can help by contacting us online or calling us at 601-202-4745 to schedule your discovery call.