You finally dealt with your back taxes or large tax debt through negotiating an Offer in Compromise, setting up an Installment Agreement, or qualifying for Penalty Abatement or another tax relief program. Now you are set, right?
Well, there are situations in which the IRS will cancel your agreement, meaning you have to pay your outstanding tax debt plus any penalty fees and interest you owe. Even if you had negotiated to pay just a small percentage of your tax debt, you now have to pay the entire amount after the IRS cancels the agreement.
Don’t worry; the IRS cannot just willy-nilly cancel your agreement. It is a legal binding contract after all. However, within that contract, there are stipulations to which you must adhere or else the agreement is nullified. It is important to read through your contract carefully so you know what you must do. The following are some common reasons that the IRS sends your account into default.
You Miss a Payment
Once you set up an Installment Agreement or settle your tax debt through one of the other tax relief programs, such as an Offer in Compromise, you have to pay your owed amount according to the approved settlement. This might be a large payment or monthly payments. No matter what the deal is, you must pay your portion owed by the deadline given in order for the deal to remain valid.
If you have set up monthly payments, the IRS can cancel the agreement and ask for the entire amount in one payment after just one missed payment. Even if you receive a tax refund, which automatically applies to your tax debt, you still need to make your regularly scheduled payments. If you end up overpaying, you will get a refund once it is sorted out. However, you do not want to end up in default because you did not pay when you assumed your tax refund would cover one or two payments.
You Forget to Include Certain Information On Your Check
The easiest way to set up an Installment Agreement is to sign up for direct debit with your bank account or credit card. Then, you never have to think about it, as long as you ensure you always have sufficient funds in your account. However, if you choose to pay by check, make sure that you include all the relevant information on your payment, including your name, address, social security number, phone number, return type, and tax year on the check itself. If you do not pay online but submit your credit card through the mail, you also want to make sure all of that information is on the payment form. Otherwise, the payment might not be applied in time, leading to a default that could cancel your Installment Agreement, Offer in Compromise, or another form of tax relief.
You Do Not File Your Taxes
Almost all of the current tax relief settlement programs the IRS offers include a requirement that you remain compliant with your future taxes. This means you have to file your return and pay your taxes moving forward. If you cannot pay for your future tax bills, you can renegotiate your Installment Agreement to include them or apply for a new Installment Agreement, but you probably will not be able to alter your other tax relief programs deals. If you do not file and pay your future taxes, then the IRS can cancel your tax relief settlement.
Your Income Changed
In some cases, any significant changes in your income might alter the deal. If the IRS determines that your new income allows you to pay off the tax debt, they might decide to cancel your agreement. However, this generally only qualifies for those who are on an income-based repayment plan in which the agreed terms were negotiated due to paying more money causing a financial hardship.
What You Can Do
The most important thing to do is to read through your agreement to ensure you know your obligations, including timely payments and filing future returns. If you know you cannot pay or will be late with a payment or filing your return, contact the IRS right away. They can often work out a deal with you to prevent the cancellation of the agreement. You will also receive a notice that your Installment Agreement, Offer In Compromise, or other tax relief settlement will be canceled. In that letter, it will inform you why and give you a period of time to take action, which is usually 30 days. During this period of time, you can appeal the decision, pay the tax bill, or otherwise take action before the IRS starts collective action against you.
Do you need help with a rejected or canceled tax relief settlement or negotiating a new one? Contact Fidelity Tax Relief to talk to one of our tax professionals. We will review your circumstances and help you decide upon the right action to resolve your problem. We also communicate with the IRS on your behalf and serve as your advocate.