Entering into a payment plan with the IRS is a common method for managing outstanding taxes. It allows you to break down your tax debt into manageable monthly payments, making what seems like an insurmountable debt somewhat easier to handle. But what happens when life throws you a curve ball and you’re no longer able to make the payments? If you default on your IRS payment plan, here’s what you can expect.
Consequences of Defaulting on Your IRS Payment Plan
Defaulting on your IRS payment plan signifies a breach of your agreement with the IRS. Typically, the IRS will place your payment plan into default if any of the following happens:
- You’ve missed a payment or failed to pay a modified payment.
- You have a new tax balance and did not pay it in full.
- The IRS requested updated financial information and you did not respond.
- You provided inaccurate or incomplete information.
- The IRS determined that your financial situation has significantly changed.
Once you’ve breached your agreement, you’ll receive Notice CP523 from the IRS informing you of your default and outlining the subsequent steps if the situation isn’t rectified.
The repercussions can escalate from accruing additional penalties and interest on your outstanding tax balance to the IRS taking more severe collection actions. These actions can include filing a federal tax lien against your assets, levying your wages or bank accounts, and seizing your property, including your home or car.
Steps to Reinstate a Defaulted IRS Payment Plan
If you receive IRS Notice CP523, you have 30 days to take the necessary steps to put your payment plan back in good standing.
- Read your notice carefully as it will outline what you need to do next.
- Contact the IRS immediately to see if you can reinstate your payment plan. You may have to pay a fee or pay any new tax liability in full before this is approved.
- Pay the overdue amount before the termination date.
If you’re unable to make the overdue payments, reach out to the IRS at the number on your notice or speak with a tax professional to discuss your options. It may be possible to restructure your agreement based on your current financial situation. You may also be eligible for other tax relief.
Whatever you do, do not ignore the notice. Failure to respond will result in your payment plan being terminated. This will initiate IRS collection actions, which typically include filing a federal tax lien and garnishing your wages. If you owe more than $59,000, the IRS could also deny or revoke your passport.
Tips for Avoiding Default on an IRS Payment Plan
Prevention is always better than a fix, especially when it comes to IRS payment plans. Ensuring that your payment plan is sustainable from the outset is crucial. This might mean negotiating a lower monthly payment amount that fits comfortably within your budget, even if it extends the duration of your payment plan.
Regularly reviewing your financial situation and staying ahead of potential issues that could lead to default is also wise. Update your contact and payment information with the IRS whenever changes occur and set reminders for your monthly payments. Be proactive and realistic about your financial situation and maintain open lines of communication with the IRS. This can help you avoid common mistakes and stay on track with your payment plan.
Final Thoughts
Defaulting on your IRS payment plan can lead to significant stress and financial strain, but it’s not the end of the road. By understanding the consequences, identifying the reasons behind the default, and taking proactive steps to address the situation, you can navigate your way back to good standing.
Remember, the IRS is often more willing to work with you than against you, as long as you communicate openly and honestly about your situation. Whether you’re seeking to reinstate your payment plan, exploring alternative resolution options, or simply looking for ways to avoid default in the first place, there are paths forward. And if the process feels overwhelming, don’t hesitate to seek professional tax help.
With careful planning, open communication, and a proactive approach, you can manage your IRS payment plan and maintain your financial stability.