Owing taxes is a distressing experience. Not only is this a debt, but it is a priority debt that even bankruptcy cannot always remove. Many taxpayers enter into installment agreements with the Internal Revenue Service (IRS) to pay off, but they may have an emergency or other unforeseen circumstance arise that jeopardizes their ability to pay off the payment plan with the IRS. If you are wondering what happens if you default on an IRS installment agreement, consider contacting an experienced and dedicated tax lawyer from Damiens Law for assistance. You can contact the office at (601) 957-9672.
What is an IRS installment agreement?
An installment agreement is a payment plan with the IRS. The taxpayer agrees to make monthly payments within an agreed period of time for back taxes they owe. The taxpayer can usually request a specific amount to pay each month as long as they pay off the debt within the collectible period. Interest continues to accrue while the taxpayer makes payments.
One important reason taxpayers enter into an IRS installment agreement is because this allows them to stay in compliance with the IRS, which prevents the IRS from pursuing additional collection activity against them.
Why would the IRS terminate an installment agreement?
The IRS can propose terminating an installment agreement when the taxpayer is in default. The IRS defines default as any of the following:
- Failing to pay payments when due under the agreement’s terms
- Providing inaccurate or incomplete financial information
- Not meeting required terms of the agreement
Common actions that may constitute default include:
- Missing at least two payments in a single year
- Failing to pay another tax liability when it is due
- Failing to make estimated tax payments
- Providing inaccurate financial information when entering into the installment agreement
- Failing to provide an updated financial statement after the IRS requests it
- Failing to pay a modified payment amount once the IRS has reviewed new financial information and required a different payment amount
- Failing to pay penalties that accrue
In some cases, default is automatic, while in others, it is discretionary.
What happens if you default on an IRS installment agreement?
If you are approaching default, you might consider, “What happens if you default on an IRS installment agreement?” If you do not pay your IRS installment agreement, the IRS may move to terminate your installment agreement. The IRS will notify you of its intent to place you in default and terminate your installment agreement. Potential consequences of defaulting on an installment agreement include:
- Additional fees and interest on your tax debt
- The requirement to pay penalties and fines
- Renew collection actions
- Stop passport renewals with the State Department
- Filing of a notice of federal tax lien
- Levy of a taxpayer’s wages or bank accounts
Working with a knowledgeable tax lawyer can help you understand your legal rights and options if default of an installment agreement is a concern.
Does the IRS have a grace period on installment agreements?
The IRS does not technically have a grace period for payments under installment agreements. The taxpayer is supposed to pay by the payment date that they have agreed to. That being said, the IRS will typically send out IRS Notice CP 523 to give the taxpayer notice of their default on the installment agreement before terminating the agreement.
This notice warns the taxpayer that the IRS may file a tax lien and levy assets if the default is not cured. The notice states that the taxpayer has 30 days to catch up on missed payments or otherwise correct the default.
How do I reinstate my IRS payment plan?
If you have received IRS Notice CP 523 and have cured the default, you will need to officially get your payment plan reinstated. Reinstating your IRS payment plan may involve the following:
- Providing additional financial details to the IRS
- Explaining the reason for your default and how you can avoid similar situations in the future
- Providing additional information about your assets
- Filling out a new installment agreement
- Setting up direct debit payments or automatic payroll deductions to ensure the IRS receives their payments on time
- Getting approval from a manager
If this is the first time you defaulted in 12 months, the process may be more straightforward and you can contact the IRS directly and request reinstatement of the IRS payment plan. You will need to pay a reinstatement fee if the IRS agrees to reinstate your agreement.
There are some instances when the reinstatement of an installment agreement is automatic. For example, the IRS can reinstate an installment agreement if the taxpayer defaulted on the agreement due to incurring additional tax liabilities and is able to pay off the amount within two additional monthly installments. Another time when a taxpayer can receive an automatic reinstatement if they qualify for a streamlined installment agreement and owe less than $50,000 in tax liability.
If the reason for your termination is the accumulation of additional tax debt, you might be required to pay off the new balance before you can reinstate the installment agreement. In some situations, you may be able to roll the new tax debt into your existing payment plan.
The IRS may offer a restructured agreement based on its assessment of the taxpayer’s ability to pay. Even if the taxpayer reinstates their installment agreement, the IRS can still file a federal tax lien.
What to do if you are facing default
It is usually better to prevent default from occurring in the first place than trying to fix the problem afterward. There are several options available to you to prevent your account from going into default, including:
Pay off your back balance
Most defaults happen because taxpayers miss payments. If this is what may be jeopardizing your installment agreement, you may be able to minimize the possibility of default by catching up on missed payments. The notice letter you receive will include a termination date or payment deadline. Be sure to make your payment before this time limit. However, before making the payment, contact the IRS to confirm that the plan will be reinstated.
Call the IRS for more options
If you are unable to make a payment or need more time, you can contact the IRS directly and ask about your options. If you will quickly be able to catch up on payments or reduce the amount of your payments to a more affordable figure, you may be able to restructure your installment agreement and avoid default. The representative may need to ask for additional information about your finances or for documentation that shows reduced income or increased expenses that supports your position.
If you do nothing in response to the notification from the IRS, officers can move to terminate the installment agreement. However, by explaining your situation to the IRS, you can allow the agency to help with your situation instead of having to take expensive collection activity.
File an appeal
If you disagree with the IRS’ decision to terminate your installment agreement, the IRS allows you to appeal this decision. However, you must file your appeal within 30 days of the date of termination of the installment agreement. You submit Form 9423, a collection appeal request, to formally disagree with the decision. A tax reviewer reviews the appeal and makes a determination on the appeal. The IRS does not take any enforcement action while a decision has not been made by the Appeals office.
A managerial conference between a revenue officer and a settlement officer from the Office of Appeals may be held. The officers determine whether to proceed with the appeals process. Managerial conferences typically occur when the IRS may take collection activity such as tax liens, asset seizures, and bank levies.
If you fail to respond to the IRS Notice CP 523 within 90 days, the IRS can change the status of your account and pursue collection activities.
Contact a tax lawyer to act as your representative
If you do not feel equipped to deal with the IRS yourself, you can appoint a qualified representative to represent you in front of the agency. A knowledgeable tax lawyer from Damiens Law can communicate with the IRS on your behalf, explain your options to you, and show that you are serious about resolving the issue. To make the appointment official, you will need to properly prepare a Form 2848 and Declaration of Representative form. These forms are available on the IRS website, or you can request them at your local IRS office.
Contact a knowledgeable tax lawyer for help
As you can see from the information above, what happens if you default on an IRS installment agreement depends on your circumstances and whether you can quickly remedy the situation. If you are afraid that you may soon be in default of your installment agreement, consider contacting a knowledgeable tax lawyer for help. Damiens Law offers a no-obligation, confidential consultation to review your tax case. You can contact the office at (601) 957-9672.