Lugging around an unpaid tax liability can become vastly simplified once you have an IRS repayment agreement in place. But what happens if you default? If you think this might happen to you, or you've already defaulted, it's important to understand the consequences and take swift corrective action.
Keep in mind that any issue pertaining to the IRS generally requires your complete attention. You can't afford to neglect a delinquent balance or delay in handling it. And though there are several reasons why you might default, the method of resolution will seldom vary.
There are typically two forms of defaulting on an IRS payment plan: failing to make a payment and incurring a new tax debt. When you first set up your installment agreement, you agreed to the terms of how much and when you would pay. Additionally, your deal includes only existing tax liabilities; in other words, new balances fall outside these terms. Your repayment arrangement, made in good faith by the IRS to allow you an extended period to satisfy your balance, can become contentious if you renege.
If you haven't yet missed a payment but think this is likely, you'll want to exhaust every resource to make sure it doesn't happen. Do you have equity on your home you can tap into? What about a limit increase on a credit card? While you wouldn't ordinarily attempt a high-interest solution to satisfy a bill, it's critical to remember that at tax liability is not an ordinary kind of debt.
Hopefully, you secured your original installment agreement before the IRS had the chance to take action against you. As a matter of self-preservation, you should resolve any defaulted agreement before you find out what collection measures the IRS can ultimately take. Depending on what you owe and how much time passes, your experience can vary.
Once you've defaulted, your repayment agreement is revoked. This is significant because it means that you have to start over. Even worse, establishing a new arrangement after you default can be problematic; you now have a tarnished history on a delinquent tax balance.
Regardless of the challenges you face in obtaining a new agreement, you can't devalue the importance of doing it quickly. What you may consider the "tax debt exception" can result in the IRS taking your wages or the money from your checking or savings account. If you neglect the tax balance for long enough, you may even fall victim to property seizure.
Whether you expect to incur a new tax balance or you are unable to afford your agreed-upon payment, you have resolution options. You may simply need to restructure your installment agreement or, if your financial situation has deteriorated, you may not be forced to pay anything at all. In order to most effectively explore these options, you may wish to consult a licensed tax professional. This will ensure that you obtain the most advantageous arrangement for you and your finances.