If you have successfully negotiated an installment agreement with the IRS, congratulations! You no longer have to be constantly looking over your shoulder for threatening letters, property liens or visits from revenue officers.
Depending on your circumstances and the amount due, the hard part could be over or it could be just beginning as you start making payments. The important thing to remember is that the major condition of your installment agreement is that you make all of your payments in the agreed-upon amount on time.
Once you have made several payments, it is not the time to start slacking off on your responsibility. The IRS might excuse a late or missed payment or two if you have a really good excuse and it does not become a habit. After all … life happens. An emergency or some other unforeseen issue may cause you either be late with your payment or unable to pay it at all.
If it appears to the IRS that you are not taking your installment seriously; if they discover after the fact that you submitted erroneous information on your application or you just stop paying at all, you will be considered in default. And that is not a good position to be in. If you are in default on your installment agreement, the IRS has the option to terminate it and you will be back at square one with a big tax debt and no way to pay it.
What Happens if You do Not Pay
The IRS defines default of an installment agreement as the taxpayer providing inaccurate information or the taxpayer not meeting the terms of their agreement. In this case, the agreement may be terminated. A taxpayer may appeal a proposed termination.
The IRS may propose termination in the event that the taxpayer fails to make an installment payment when it comes due; fails to pay another tax liability; fails to provide
an updated financial statement, provides inaccurate information and fails to pay a modified payment based upon submitted updated information.
Taxpayers who do not meet the terms of the installment agreement “will be notified in writing and given 30 days to comply with the terms of the agreement before the agreement is terminated” (IRS.gov, “Part 5. Collecting Process, Chapter 14. Installment Agreements, Section 11. Defaulted Installment Agreements, Terminated Agreements and Appeals of: Proposed Terminations (Defaults), and Terminated Installment Agreements,” 8/21/2013).
A taxpayer whose installment agreement is monitored by the IDRS will receive Notice CP 523, Defaulted Installment Agreement – Notice of Intent to Levy. A defaulted installment agreement may be reinstated without manager approval if it is determined that the agreement was terminated “because of an additional liability and if addition of that new liability will result in no more than two additional monthly payments and the agreement will not extend beyond the Collection Statute Expiration Date (CSED)” (“Section 11. Defaulted Installment Agreements, Terminated Agreements and Appeals of: Proposed Terminations (Defaults), and Terminated Installment Agreements”).
The IRS will first make a lien determination before considering the request for reinstatement. Default and reinstatement terminations due to the taxpayer missing and/or skipping payments will require manager approval.
The taxpayer may request a Collection Appeals Program (CAP) hearing to discuss the proposed terminations and actual terminations of installment agreements. The law provides for the taxpayer to appeal a termination of an installment agreement.
See the Regular Installment Agreement (Over $50,000) section. The IDRS stands for Integrated Data Retrieval System, “a mission critical system consisting of databases and operating programs that support IRS employees working active tax cases within each business function across the entire IRS” (IRS.gov, “Integrated Data Retrieval System (IDRS) – Privacy Impact Assessment,” 8/21/2013).
As a warning ... if the taxpayer ends up defaulting on their installment plan and becomes subject to collection activity, this is probably one of the first places that the IRS will hit with a levy action.
Tax payment plans are fairly easy to navigate if you follow all of the IRS’s requirements.
Generally, it is better that taxpayers try to meet all of these requirements before trying to set up a tax payment plan with the IRS because it will minimize the time that they may be exposed to active IRS collections and adverse collection activity.
Doing so will also expedite the process and will minimize the headache involved in dealing with the IRS. I have coached many taxpayers through setting up their own tax payment plans using these very steps. It is not rocket science. Follow the rules and make your required payments on time.
However, if you find yourself in a situation where you are unable to keep up with your payments or comply with any other issues of your installment agreement, give me a call. I have helped clients iron out their installment agreement problems and prevented the IRS from terminating the agreement. Regardless of your situation, I cannot stress the importance of staying in touch with the IRS; this is no time to bury your head in the sand.