In Part 1 of this blog series, we discussed when taxes are generally due for the average individual taxpayer, as well as some tips if an extension needs to be filed. We also discussed the 120-day payment extension the IRS provides some taxpayers if they need additional time to pay the tax due. In Part 2, we walked through the features and advantages of a Guaranteed Installment Agreement. In Part 3, we discussed the various Streamlined Installment Agreement available.
It’s a warm, sunny Saturday afternoon. You’ve stopped in your favorite frozen yogurt shop to make a tasty treat. You’ve added your favorite toppings, a cherry, well maybe two, and rainbow sprinkles. Just as you are about to take your first bite, disaster strikes and the paper bowl that is holding your frosty creation falls to the floor. Sometimes, circumstances can arise when a taxpayer is in an installment agreement with the IRS that can make the experience feel like a perfect sundae that falls to the floor before taking the first bite. Just one unexpected financial challenge (the refrigerator dying or your dog Fido dancing the Tango with the backyard cactus) can bring your Installment Agreement to a sudden halt. So, what happens if you miss an Installment Agreement payment and/or can no longer make the agreed upon payments?
When financial disaster strikes, our first instinct may be to “hide” from the IRS by missing a few payments and hoping our finances will improve in a few months. After all, with so many taxpayers, the IRS will not miss a monthly payment for a month or two, right? This is when fighting our first instincts may prove to be financially and emotionally beneficial. It’s a terrible feeling to dread the mailbox, and this dread can be alleviated by contacting the IRS as soon as you realize an installment agreement payment may be missed. There are a couple of ways the IRS can be notified when there is a financial change. The first option is contacting the IRS by phone (800-829-1040). For those who have a non-direct debit payment plan, you can log onto the Online Payment Agreement tool on the IRS website, which can be accessed by clicking HERE. Within the Online Payment Agreement tool, you can request changes to the type of installment agreement you are on (for example, switching from submitting a monthly check to a direct debit agreement), changing the payment date, and changing the amount of the payment. Once the request is submitted, the IRS will make a determination as to whether or not to agree to the changes. Generally, if the adjusted payment request still allows the liability to be paid in full before the 10-year statute of limitation on the liability expires, the IRS will approve the request. (For most tax liabilities, the statute of limitations on collecting the tax due is ten years from the date the tax is assessed.) If you already have a direct debit payment plan agreement, you will need to contact the IRS by phone to make any changes, as you will not be able to use the online tool. In addition to using the telephone number listed above, you may also call the telephone number listed on your most recent IRS notice.
In most cases, depending on your income level, the IRS will impose a fee for restructuring or reinstating an installment agreement. Keep in mind that incurring additional tax deficiencies during an active installment agreement period is considered defaulting on the current payment agreement with the IRS. If you need to add another tax liability to an established installment agreement, be prepared that the IRS may assess a reinstatement fee. For those who meet the IRS’s criteria for low income (which is generally those whose adjusted gross income is at or below 250% of the applicable federal poverty level), the fee is $43. Those who make their payments via electronic direct debit and have not defaulted on their agreement, can restructure their payment plan for no charge if they continue to make their payments via electronic direct debit. The fee for all other taxpayers is $89. Generally, the fee is added to the remaining balance due.
If you cannot pay the entire tax liability within the general installment agreement period (which is six years or seventy-two months), the IRS will request additional information about your income and living expenses in order to determine what you are able to pay. This information will be compiled on IRS Form 433 Collection Information Statement. When filing out this form, the taxpayer will list all their bank and retirement accounts, investment activities outside of their retirement account, any real estate owned, other assets such as vehicles, boats, whole life insurance policies; credit cards, business information, employment information, non-wage income and monthly living expenses. IRS will review the information and determine what amount the taxpayer can be expected to pay based on their information.
Because the form requires the taxpayer to provide detailed information of living expenses, and the IRS caps the allowable living expenses at certain amounts, it is not unusual for the IRS to determine a higher payment amount than the taxpayer feels is “reasonable.” Even if the taxpayer is requesting an economic hardship, the IRS may determine that the money the taxpayer has available is greater than the taxpayer actually has. The largest area of discrepancy lies between what the taxpayer is actually paying for a living expense versus what the IRS will allow, which includes housing expenses, high utility costs, car payments, and conditional expenses such as retirement contributions, loan repayments, and credit cards. For example, the IRS may not take into consideration payments being made to credit cards like MasterCard or American Express when determining the installment agreement payment amount. This is because the IRS considers themselves a higher priority for payment than MasterCard or American Express.
After reviewing Form 433, if the IRS determines the taxpayer cannot make current payments towards their tax liability, the IRS will place the taxpayer in currently not collectible status. In this economic hardship status, the IRS will temporarily suspend payment requirements and collection activities until such a time that the taxpayer can start making payments again.