The IRS makes it easy to sign up for an Installment Agreement to pay your taxes over time when you find it difficult to pay the entire amount upfront. If you are an individual who owes less than $50,000 in the total amount combining the tax, interest, and penalties, you can apply online for an Installment Agreement. Otherwise, you can still apply, but you must do so through the mail.
With an Installment Agreement, you still accrue interest and penalty fees, but you get a reduction in the penalty fees from 0.5% to 0.25%. Although you may find a better term from a private loan or credit card, the application for an Installment Agreement does not involve as much as that for a private loan, making it easier for some people to qualify.
There is one major caveat to this agreement: that you pay the agreed upon amount every month for the life of the term. You must pay all scheduled payments even if you know that your tax refund is being applied to the balance. So, what happens when you miss a payment? Let’s find out.
Defaulting on Your Installment Agreement
Technically, missing a payment could cause you to default on your Installment Agreement. When you default, you will now be liable to pay the entire amount of the tax bill that you have left in one payment. If you do not pay this amount by the deadline, which is usually 30 days, then you risk entering collective action, which usually starts with a lien on your account. You can reinstate your Installment Agreement, but you often must pay a reinstatement fee, and you may have higher penalty fees until your payment plan is reinstated.
Reasons that your Installment Agreement may be canceled:
- Missed payments
- Frequent late payments
- A new tax debt
- Not filing tax returns
- Not paying your current tax liability
Although the IRS may not alert you that they are canceling your Installment Agreement, they usually do not cancel it at the first sign of a missed or late payment, allowing you time to take action before you fully default or have your Installment Agreement canceled.
What to Do If You Miss a Payment
Luckily, you do have some time to act after a missed payment to prevent you from defaulting on your Installment Agreement. As soon as you realize you missed a payment for your Installment Agreement, make the payment. Contact the IRS if you feel that you may be at risk of a default leading to the cancelation of your Installment Agreement. If you are temporarily not able to pay, contact the IRS and alert them of your financial situation. They may offer a solution, including temporary amnesty or a reduced payment.
Do not be afraid to contact the IRS to alert them of your situation and let them know that you know you missed a payment but went ahead and made a late payment. Communication is one of your best tools to avoid negative consequences of a missed payment, including a default. Despite their negative reputation, the IRS does have a willingness to help taxpayers. In general, they will not default an Installment Agreement after just one missed or late payment, and so you usually have a 30-60 day grace period. However, communicating with the IRS will ensure you do not end up with an unexpected consequence, such as a lien.
What If Your Financial Situation Has Changed?
Sometimes missing a payment is not just about forgetting or having a temporary financial issue; at times, it is because your financial situation has changed and you no longer can afford the previously agreed upon terms. Perhaps you lost your job or had a medical situation that racked up the debt. When this happens, contact the IRS directly to discuss the options for amending your Installment Agreement to reflect your current ability to pay. Be prepared to provide proof of the changes in your circumstances.
How to Prevent Defaults
You want to try to prevent a default on your Installment Agreement as much as possible. The best way to do this is to set up a direct debit as part of your plan so you don’t have to remember to send in the payments, although you do have to make sure that you have adequate funds in your account at the right time of the month. Taking action as soon as possible after a missed payment also helps you to avoid a default.
If you struggle with your tax debt and do not wish to work directly with the IRS, then contact Fidelity Tax Relief at 877-372-2520. Our tax professionals will review your situation and discuss the best options for you. We will work as your advocate to the IRS, resolving your tax issues and helping you avoid entering collective action.