If someone owes the IRS more money in taxes than they can pay, the IRS has a plan to help. This plan is called an installment agreement, allowing the person to make smaller payments over time until the debt is paid off. If someone falls behind on their payments or stops making payments altogether, the IRS can declare them to be in default and end the installment agreement.
This article discusses what you need to do if you default on an IRS payment plan.
When Do You Default on an IRS Payment Plan?
If you default on your taxes, you either miss a payment or cannot make a payment. If you have a good reason for missing a payment, the IRS may be understanding, but if it becomes a habit, they will start to view you as being in default. This usually happens when the IRS thinks you’re not taking your payment plan seriously or stops making payments altogether.
Here are four instances that lead to defaulting on an IRS plan:
- You missed payments on an IRS payment plan
- Not paying tax liability on time or owing balance from another return
- Not providing updated financial information
- Not paying a modified amount agreed to with the IRS
Multiple Collection Arrangements for a Single Taxpayer
If you have been enrolled in an installment agreement for one year, and you file and owe the IRS money again the following year, you will not be able to set up a new payment plan just for the new balance. Instead, the new balance will have to be added to the existing payment plan.
After Defaulting on a Payment Plan
If you default on a payment plan, the entire balance you owe the IRS will become due immediately. The IRS can also file a Notice of Federal Tax Lien to secure the amount you owe. The lien will appear on your credit report and may make it difficult for you to obtain a loan.
The IRS can also garnish your wages. They can collect up to 25 percent of your disposable pay each pay period. The IRS can also seize your assets and bank accounts.
The timeline after defaulting on an IRS payment plan occurs in this sequence:
- The IRS issues you a default notice by sending (CP523 OR Letter 2975)
- You can reinstate the agreement or ask for a new one to prevent levies
- Your current installment agreement will be reestablished, or the IRS can set up a new one, depending on their choice
- The IRS can seek enforced collection of the amount 90 days after the issued CP523 if a new agreement was not introduced
If you find yourself in a situation where you are unable to make your IRS payment plan payment, it is important to take action immediately. The first step is to contact the IRS and explain your situation. They may be able to work with you to set up a new payment plan. If you cannot agree with the IRS, you may have to consider other options, such as a short-term loan or selling assets. Whatever you do, it is important to avoid defaulting on your IRS payment plan, as this can lead to severe consequences.
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