Paying back a tax debt all at once can be an unmanageable financial burden. Fortunately, the IRS has a host of installment agreements which can allow you to satisfy your balance over time. Depending on how much you owe, your financial resources, and your tax history, choosing the right agreement can be simple and painless. Defaulting on such an arrangement, however, can place you in the IRS’ crosshairs.
While the IRS is relatively flexible when it comes to approving a payment plan request, the agency has little patience for those who fail to meet the terms of their agreement. Missing a payment or electing to stop paying altogether can result in stepped-up collection activity and additional cost for you. As you’re considering a payment deal that works best for you, don’t overlook the consequences of reneging.
If your tax balance falls somewhere between $10,000 and $50,000 (and you’re current with all of your tax returns), you’re likely a candidate for a standard installment agreement. This allows you to pay your debt over a period of 72 months, rather than all at once. This type of agreement does not mitigate the penalties and interest you’re charged, as they continue to accrue monthly until you balance is paid in full.
If you fail to meet the terms of the agreement, such as making your payment timely, the IRS will send you a notice informing you that it’s been terminated. This not only puts you back at square one, it complicates your ability to obtain a new arrangement. Additionally, you open yourself up to more aggressive collection action. Ultimately, the IRS can employ a bank levy or garnish your wages to ensure that the balance is paid.
In the event that you can only afford to pay a portion of your tax debt, you may qualify for a settlement offer with the IRS – otherwise known as an Offer in Compromise (OIC). This type of agreement is notoriously tricky to qualify for and suspends the collection statue expiration date (the ten-year clock on your debt) for however long it takes to review your case, perhaps as long as a year.
If approved for an OIC, you’re held to stringent requirements. For instance, you’re obligated to ensure all tax returns are filed and new balances are paid, on time, for a period of five years. If you default, you’ll be held responsible for paying the entire original balance, pre-reduction. And the life of your debt now has an extension (don’t forget that review period that suspended the collection time). Finally, you are similarly vulnerable to more invasive IRS collections by defaulting on an OIC.
No matter which step you intend to take to resolve your tax debt, make sure you consult with a licensed tax professional beforehand. He or she will not only review your best options, you’ll be advised on the specific obligations built into each agreement. A tax professional will also discuss in detail what to expect if you default. Be sure that you can comfortably afford whatever payment is required of you and that you mind the specifics of your agreement. This will save you time, money and a considerable amount of stress.