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What Happens If I Default On An IRS Installment Agreement?

Installment Agreements Generally

Taxpayers do not always have the financial wherewithal to pay all of their federal tax obligations on time.  In these instances, the Internal Revenue Code (the “Code”)[i] grants taxpayers with a statutory right to request additional time to make full or partial payment through an installment agreement.[ii]  If the IRS accepts the terms of the installment agreement, the taxpayer benefits in that the IRS is precluded from levying against the taxpayer’s assets, provided the taxpayer continues to comply with the terms of the agreement.[iii]  Moreover, the IRS benefits in that it is not required to devote its resources to investigate the taxpayer’s financial situation and also seek levy of the taxpayer’s assets to satisfy the outstanding tax debts.

IRS Form 433-D.[iv]

Generally, a taxpayer enters into an installment agreement with the IRS through execution of an IRS Form 433-D, Installment Agreement.  A standard-form Form 433-D provides the following terms and agreements amongst the parties:

  1. The amount of the monthly payment to the IRS;
  2. Whether the monthly payment will remain static or increase/decrease after a specified period of time;
  3. Recognition by the taxpayer that the agreement is based on the taxpayer’s current financial condition and that the agreement may be modified or terminated if the IRS has information that suggests that the taxpayer’s ability to pay has “significantly changed”;
  4. Recognition by the taxpayer that the taxpayer must remain compliant with other federal tax reporting and payment obligations while the agreement remains in effect;
  5. Recognition that the IRS may terminate the installment agreement in certain instances, including: (1) if the IRS has information that suggests that the taxpayer’s ability to pay has “significantly changed;” (2) the taxpayer has failed to stay compliant with all federal tax reporting and payment obligations; (3) the taxpayer misses a monthly payment; and (4) the taxpayer fails to provide requested financial information to the IRS.

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5 Benefits Of Negotiating An IRS Installment Agreement

An IRS installment agreement is one of the best ways to resolve your tax debt problems. You can avoid most types of IRS collection actions and pay off several years of tax debt as long as you make your monthly payment.

Key Insights We Will Discuss:
Why IRS installment agreements are such a popular tax resolution option.
How an installment agreement protects you from IRS levies and liens
How you can modify your installment agreement should you need to

Benefit #1: Avoid IRS Levies
The IRS can seize your bank account or wages to collect back taxes. If you enter into a payment plan, the IRS will generally stop pursuing any type of levy as long as you make your monthly payments.

The one exception is a tax refund offset. The IRS may continue to seize your tax refund checks until your debt is paid off in full.

Benefit #2: Pay Off Several Years of Tax Debt
If you owe tax debt for several years, you may receive a separate set of notices for each year. You may become confused and overwhelmed when trying to figure out what you owe for each period in back taxes, penalties, and interest.

You can pay off multiple years of tax debt with one monthly payment. Before you start, have a tax attorney request your tax transcripts to determine how much you owe for each period.
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Venar Ayar - IRS Audit

If you owe the IRS a substantial amount, be sure not to ignore it. Review options such as installment agreements, extensions, or personal loans, and always seek legal advice from a professional tax attorney.

While you may want to put off dealing with tax debt and that sinking feeling that you owe the IRS, not handling it will likely lead to additional penalties, interest, and other major consequences. If you can’t pay the debt by its due date, you still need to file a return on Tax Day and/or have your tax preparer file a six-month extension. This will give you more time to seek professional help and discover what options you have to settle the debt. To avoid this and other penalties, carefully review the action steps below.

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Venar Ayar, Tax Defense Attorney
If you the IRS back taxes, an installment agreement may be the way to go.  They are easy to set up, easy to get approved for, and if you set them up right – easy to stay compliant with.  However, in spite of all of this, people still make mistakes with their installment agreement that cause them to default and land them back into collections with the IRS.  So we decided to outline some of the most common mistakes people typically make when entering into an IRS installment agreement and ways to avoid them.  Here they are.
1.) Agreeing to Pay More Than They Can Afford

This is a mistake, as tax pros, that we see often. I am not sure if it’s people’s natural fear of the IRS or maybe they’re overeager to pay off their tax debt but for whatever reason, when setting up their installment agreements, people tend to agree to pay way more (per month) than they can afford.  As someone who deals with the IRS on a daily basis, I can tell you that if you are afraid of the IRS and think that you need to agree to pay more or otherwise they may hound you, you need to take that fear and that belief and throw it in the garbage where it belongs.  At the end of the day, when you are dealing with the IRS, you are really just dealing with other humans.  They aren’t robots without feelings.  They are not out to get you.  And they understand that people make mistakes.  They want to help (as long as you haven’t done anything illegal of course).  And if you go to them and explain “yes, I know I made a mistake but I would like to rectify that,” they will do everything in their power to help you.  That includes setting up a payment plan that works for you.  So before you make that call, sit down and take a look at your monthly expenses and income and really do the math and think about a reasonable amount you can afford to pay them each month and still afford to get by.  If you can’t afford to pay them anything, then you probably qualify for Currently Not Collectible (CNC) status and you should look into that instead of an installment agreement.  At the end of the day, the IRS will just be happy that you have taken steps to remedy the situation – however much you decide to pay each month.

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