About 18% of all IRS payment plans default each year. The long-term consequences of defaulting on an IRS payment plan may impact your borrowing power and credit standing for many years down the road. Getting sideways with Uncle Sam is never a good thing. So, why let it happen?
There is never a good time to encounter a hefty federal tax obligation, but taxpayers don’t always have the financial means to pay those taxes on time.
What are IRS Payment Plans?
Fortunately, the IRS Code provides taxpayers with a statutory right to request additional time to make partial or complete payments through an IRS Payment Plan. A significant benefit of the plan is: If the IRS agrees to the terms of the payment plan, and the taxpayer complies with the terms of the agreement, the IRS is precluded from sending threatening letters, seeking a levy against your assets or property, file liens, or send revenue officers for collection.
Keep in mind that the most significant caveat of the IRS Payment Plan is that you make all your payments on time. However, if a taxpayer falls behind on their IRS payment plan, the IRS can opt to terminate the agreement, and the taxpayer falls into default, setting them back with significant tax debt and no way to pay it.
Once in default, a notice, CP523, is sent to the taxpayer, informing them about the default and the action the IRS can take to recover taxes owed. Some of the options the agency has available to collect the debt include:
- Freeze bank or investment accounts
- Seize assets
- Wage garnishment
An unforeseen issue or another emergency may cause you to either be late with your payment or unable to pay. The IRS is not unreasonable. They may excuse a late or missed payment or two if you have a valid reason.
Defaulting on an IRS Payment Plan is not ideal. The IRS CP523 notice offers advice on how to get back on track. Here are some of the options available:
1. Make all payments to bring the account current.
2. Renegotiate the installment plan. Contact the IRS; they may require you to provide proof, i.e., pay stubs and bank statements.
3. Contact the IRS. Discuss your situation with them and don’t ignore the notice, as that will only make matters worse. Responding to the notice by the deadline is essential, usually within 30 days of receiving the notice.
4. Other options are also available
It is critically important that you do not default a second time if you successfully renegotiate your IRS Payment Plan. Review your tax rate to ensure you set aside enough to cover your tax burden. Additional defaults can lead to sizable fees, fines, and an even more significant tax burden. It could also preclude you from an IRS Payment Plan in the future.
For those with financial issues, speaking with a professional financial solutions organization, such as Fiscal Solutions, LLC, could help get their financial situations back on track.
What Happens if Your IRS Payment Plan Goes into Default?
If the IRS discovers, after the fact, that you submitted erroneous information or did not meet the terms of the agreement, you will be in default, and the IRS may terminate the contract. Failure to provide updated financial statements is also considered a default. A taxpayer does have the right to appeal a proposed termination.
If you filed your taxes promptly but didn’t pay the taxes, interest is assessed on the unpaid amount. A failure-to-pay penalty can also be assessed; this amount is equal to 1/2 of 1% per month or part of a month, up to 25%, of the amount still owed.
What Causes Default?
According to the IRS, four reasons are considered defaults to an IRS Payment Plan that requires the taxpayer to address promptly to avoid enforced collection:
- Missed payments: You missed two payments in a year.
- Another balance owed: You file another return or have another balance owed and do not pay the balance in full.
- Non-responsive to IRS: The IRS asks you to provide updated financial information, and you provide incomplete information or do not provide the information.
- Did not adjust payments: You failed to pay a modified payment amount agreed upon.
The IRS allows only one IRS Payment Plan per taxpayer. They will not give you a separate payment plan on any new return balance owed.
Opportunities for Reinstatement
The IRS sends one of two notices, CP523 or Letter 2975, if:
- You miss a payment.
- File another return with a balance due without payment.
- Fail to comply with the terms of the payment plan.
These notices and letters do not terminate your IRS Payment Plan; they put you on notice that you must take action within 30 days. The IRS will issue a levy 90 days after the notice date if not rectified promptly. If corrected, you can reinstate the IRS Payment Plan 30 days after the letter to avoid IRS levies; the IRS has the discretion to request new financial information.
Starting from Scratch
If you do not qualify for the automatic reinstatement, the IRS will want financial information based on your circumstances and the amount owed. If the default were created due to a new balance from a recently filed return, the IRS would require you to increase your withholding or pay estimated tax payments if underwithholding caused the new balance.
The Cost of Doing Nothing
Taxpayers may face enforced IRS collection if they do not get back into good standing with the IRS within 90 days. If a taxpayer owes more than $53,000, the IRS starts passport restriction proceedings. The IRS will also seek levies from employers, financial institutions, and other payers.
If you agree to direct debit payments and reassure the IRS that you will not owe again, they often allow you to reinstate your IRS Payment Plan, and you pay the reinstatement fee of $89.
Can You Go to Jail for Defaulting on an IRS Payment Plan?
If you misrepresented or misled the IRS, the penalties may include jail time and fines up to 200% of the total amount of taxes and up to two years in jail.
Does the IRS Forgive Debt?
It is rare for the IRS to forgive tax debt, but the obligation may be deferred if you can prove a hardship qualifies you for Currently Non-Collectible status.
Take Control of Your Tax Issues
Fiscal Solutions, LLC., Houston, Texas’ top-rated tax resolution firm, is owned by Mr. Randy Lewis, a 20-year veteran as an IRS Revenue Officer. Mr. Lewis’ in-depth knowledge and experience with Federal tax laws can help negotiate the most equitable resolution to fit your budget, ensure successful payments and remove the constant threats from the IRS. Give Fiscal Solutions a call today to discuss how we can help. Your case will get the attention it deserves!