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Taxpayers often find themselves owing back taxes but are unable to pay the full balance all at once. The IRS allows the debt to be paid back in installment agreements, for those who qualify. Typically, this type of arrangement is determined by the dividing the total debt by 72 monthly payments.
Example: The total tax liability is $18,000. This amount is divided by 72, bringing the monthly payment to $250.
The taxpayer will have this amount withdrawn directly from his or her bank account each month and must pay future taxes on time, in order to be compliant with the terms of the agreement. Also, the information provided by the debtor to the IRS during the agreement request must be true and accurate, to keep the arrangement intact. In the event that the information given by the taxpayer is false, the IRS will issue a notice of agreement termination.
When a taxpayer compromises an installment agreement by missing a payment, or failing to pay additional taxes, the consequences can be swift and unsettling. If an individual has defaulted on his or her plan, the IRS has a process in place to notify the taxpayer and allow the mistake to be corrected. It's important to know what to expect and what action to take in such a situation.
The Clock Is Ticking
Once an installment agreement is defaulted, the taxpayer receives written notice from the IRS. Within this notice, the debtor is instructed he or she has 30 days to comply with the terms of the agreement or face termination. All collection efforts are halted during this period to allow the taxpayer to get back on track. Following this 30-day timeframe, if the taxpayer has not replied, the installment agreement will be canceled.
After cancelation, the debtor has an additional 15 days to send an appeal. If an installment agreement has been canceled, and no appeals are made, the IRS will likely send a notice of levy, otherwise known as Notice CP 523. The taxpayer will typically receive this notice 90 days after the initial 30-day notice was received. The government's intent to levy can put a taxpayer's property and assets into jeopardy, as they may be seized to satisfy collection efforts.
It's critical to respond to any notices received by the IRS. Ignoring a cancellation warning or notice of intent to levy only confirms the taxpayer is not working to resolve the problem. The IRS expects debtors to take their debt seriously and make every effort to remain complaint with an installment agreement.
Putting the Pieces Back Together
Many times, a taxpayer defaults on an installment plan because he or she doesn't have the funds to pay the agreed upon amount. As such, the IRS will carefully evaluate the debtor's ability to pay in order to decide whether or not the agreement will be reinstated. The IRS will also verify the taxpayer's compliance with federal tax deposits, tax return filing and estimated tax requirements. Individuals who have continuous problems remaining compliant with an installment agreement or working with the IRS are encouraged to seek the assistance of a licensed tax professional.