Installment agreements can be a useful way to resolve your back tax problems, but can also lead to problems if you commit to larger payments than you can afford. The blog will explain what can happen if you default on an installment agreement, how to get right again with the Internal Revenue Service, and why you should have a tax professional help.
What Is an Installment Agreement With the IRS?
An Installment Agreement is an arrangement between the IRS and a delinquent taxpayer allowing the individual to pay off their unpaid taxes by making monthly payments. This is an especially attractive option for people who can’t afford to pay the full amount due on their tax return, because it helps to reduce or even eliminate penalties and interest related to their tax liability.
However, when individuals negotiate an IRS payment plan without the help of a skilled tax professional, they often arrive at an agreement they can’t afford, which frequently leads to them defaulting on their arrangement.
What Triggers an Installment Agreement Default?
More than one million taxpayers default on their Installment Agreements every year. In most cases, taxpayers default for one of the following four reasons:
- The taxpayer misses two installment payments within a single calendar year. (The IRS permits one missed or late payment per year.)
- The taxpayer fails to provide required financial information.
- The taxpayer owes a separate balance that they are unable to pay.
- The taxpayer fails to pay a modified payment amount.
What Happens If You Default on an Installment Agreement?
Regardless of your circumstances, if you stop paying or fall behind on an Installment Agreement, the IRS will likely nullify the arrangement and place you in default. At this point, the IRS will send you a CP523, which is a notice of intent to cancel your Installment Agreement and inform you of the collection actions they can (and will) take to satisfy your debt — including federal tax liens, levies, garnishments, and more.
The good news is that the IRS usually doesn’t immediately place delinquent taxpayers in default when they’re behind on their Installment Agreements. If you aren’t current, you should be proactive. Contact the IRS, explain your situation, and try to negotiate your arrangement. The IRS is fairly reasonable and might be willing to work with you if you can provide proof of a hardship. Moreover, if you’re in a position where you can bring your account current, do so as soon as possible to avoid a default.
Whatever you do, don’t ignore the notice of default. This problem won’t just magically disappear, so be smart, be proactive, and contact the IRS as soon as possible. Or, better yet, contact a tax professional to help you avoid default and renegotiate your Installment Agreement.
Related Content: IRS Installment Agreement Services
Will the IRS Reinstate Your Installment Agreement?
In many cases, yes, you can negotiate a reinstatement. Again, the trick here is to be proactive. You need to respond within 30 days of receiving the IRS notice of default and show them that you’re suffering a hardship that is preventing you from making tax payments according to the terms of your installment plan.
Maybe you can get your account current by paying a little extra each month.
Or maybe you can renegotiate your arrangement with terms that align with your current financial situation.
If all else fails, you can dispute the termination of your Installment Agreement with the IRS through the Collection Appeals Program (CAP) by completing and filing a Form 9423.
Regardless of your situation, don’t ignore the writing on the wall and don’t assume the IRS won’t pursue you. Be honest and be active, and you should be just fine. But if things feel too overwhelming, you should contact a skilled and experienced tax attorney.
Set Up an Installment Agreement You Can Afford With S.H. Block Tax Services
Negotiating an affordable Installment Agreement with the IRS is one of the best ways to eliminate your tax debt. At S.H. Block Tax Services, we have a reputation for setting up economical Installment Agreements for our clients that allow them to escape their tax issues and live a life of financial freedom.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.