What Happens If You Default on Your IRS Repayment Plan?

What Happens If You Default on Your IRS Repayment Plan?

• Apr 01, 2022

If you’ve managed to negotiate a repayment plan for your federal tax debt, it can feel like there’s nothing but smooth sailing ahead. However, it’s important to remember that your new repayment plan is just the beginning of settling your debt with the IRS. Once you have a settlement agreement, you’re expected to strictly adhere to the terms of that agreement. But what happens if you fall behind on your repayment plan? Keep reading to find out.

The IRS Can Terminate Your Plan

The most common course of action that the IRS will take on your account is to simply terminate your repayment plan. This puts you back at square one, with a large tax debt and no installment plan for settling it. What many people don’t know is that this can happen as soon as you default on a payment. The IRS will send you a notice of their intent to terminate your installment plan, giving you 30 days to take action and get things back on track. However, that is the only warning you will get, and you’ll get it as soon as a payment is late. If you act within the given 30 days, you can typically keep the agreement.

What If You Can’t Make the Payment?

Your installment payments are calculated based on your available income and assets, so the IRS doesn’t offer much leeway on those payments. If you miss your payment due to extenuating circumstances, they may be willing to work with you on one or two missed payments. However, if you have not experienced a drastic change in your income or an unexpected hardship that limited your ability to pay on time, there’s not a lot of wiggle room on your repayment plan.

What Courses of Action Can You Take?

If the IRS terminates your repayment plan, there are still a few steps you can take to try to get it reinstated. The first is to submit a request for reinstatement. Typically, the IRS will make a lien determination on your account first, effectively securing their interests before considering your reinstatement request. You may be reinstated without manager approval if:

• The termination was caused by an additional expense/liability that made you unable to pay
• The additional liability will not result in more than two additional monthly payments
• The reinstated agreement won’t extend beyond the expiration date for collecting your debt

Reinstatements due to simply missing or skipping payments will have to go through a manager for approval. You may also request a Collection Appeals Program (CAP) hearing to appeal the termination of your installment agreement.

What If You Default on New Tax Debt?

What if you’re on a repayment plan, but can’t afford your tax bill for this year? Can you apply for another repayment plan? Unfortunately, the answer to this question is no. An IRS settlement plan encompasses all tax debt. What’s more, this means that failing to pay what you owe in taxes this year will put you into default on your repayment plan, and put you at risk of losing that plan altogether. This is why it is a requirement of most repayment plans to pay your taxes on time for the next several years.

If your taxes for this year are higher than you can afford while still making payments on your IRS installment plan, you can contact the IRS and ask them for a revised plan that would encompass this year’s taxes as well. However, it’s worth noting that these requests are not always approved. The IRS will have to perform another analysis of your finances to determine if you would qualify for an updated plan. So, if you think you will need to have this year’s taxes added to an existing plan, it’s important to take action as soon as possible, before you default on your tax debt.

Get Help with an IRS Installment Plan

Whether you’re hoping to qualify for an IRS repayment plan, have defaulted and want to reinstate your plan, or are hoping to have new tax debt added to an existing plan, contact the IRS Advocates for help today. We are experts at navigating tax settlements, and can help you find a way to repay your tax debt while still meeting your other financial needs. Check out our home page for a free analysis to see if you would qualify for an IRS repayment plan, or contact us today to get answers to your questions. We are your advocate, and we’re here to help you in any way we can.