Adding to an IRS Installment Agreement: What You Need to Know
Learn how to modify your IRS installment agreement to include new balances while managing payment changes and staying compliant.
Managing tax liabilities can be challenging, and for many individuals, an IRS installment agreement offers a manageable way to pay off debts over time. However, life circumstances may change, prompting taxpayers to modify these agreements. Understanding how to make changes is crucial for staying compliant with the IRS and avoiding penalties.
Conditions for Modification
Modifying an IRS installment agreement requires meeting specific criteria. Taxpayers must be in good standing, meaning all payments under the current agreement must be up to date. Missed payments can complicate the process and risk defaulting on the agreement.
New tax liabilities must also be assessed and finalized before they can be added. This requires filing all necessary tax returns and receiving a notice of assessment for the new balance. The IRS will not include estimated or unassessed amounts in an installment plan to ensure the total liability is accurately reflected.
Taxpayers must also demonstrate the ability to meet the revised payment terms. The IRS reviews income, expenses, and assets to confirm the taxpayer can realistically adhere to the new agreement without defaulting.
Process for Adding New Balances
Adding new balances to an existing IRS installment agreement involves a formal request, typically submitted through Form 9465, the Installment Agreement Request, or the IRS’s Online Payment Agreement tool. These methods streamline the submission process.
After the request is submitted, the IRS reviews the taxpayer’s financial situation, including income and expenses, to evaluate whether the revised terms are feasible. Additional documentation, such as pay stubs or bank statements, may be required to verify financial status.
The IRS then calculates the revised payment terms based on the total balance, including the new liabilities, and the taxpayer’s ability to pay. Factors like disposable income and reasonable living expenses are considered. The IRS may adjust the length of the agreement or require a larger initial payment to accommodate the updated balance.
Changes to Payment Amounts
Adjusting payment amounts requires an updated financial assessment. If a taxpayer’s income or expenses change significantly, the IRS recalculates the monthly payment to match their ability to pay.
The IRS considers the total tax liability, including newly added balances, and evaluates the taxpayer’s disposable income and allowable expenses based on IRS Collection Financial Standards. Form 433-F, Collection Information Statement, may be used to gather detailed financial data for this purpose.
Potential Fees and Interest
Modifying an IRS installment agreement may involve user fees, which vary depending on the application method. Online modifications typically incur lower fees than paper filings. Low-income taxpayers may qualify for reduced fees.
Interest and penalties continue to accrue on unpaid taxes, even when included in an installment agreement. Interest is calculated quarterly, based on the federal short-term rate plus 3%. Additionally, a late payment penalty of 0.5% per month, up to 25% of the unpaid taxes, applies. This penalty may be reduced to 0.25% for taxpayers in installment agreements. Over time, these costs can add up, so understanding them is essential for effective financial planning.
Maintaining Compliance
Staying compliant with an IRS installment agreement is critical, especially after modifications. Taxpayers must make all payments on time, as missed payments can lead to termination of the agreement and potential collection actions, such as levies or liens.
Compliance also requires staying current with future tax obligations. Taxpayers must file all subsequent tax returns on time and pay any taxes owed by their due dates. Falling behind on new tax obligations can trigger default, even if payments on the existing agreement are current.
To avoid issues, taxpayers should consider setting up reminders or automatic payments to ensure timely payments. Consulting a tax professional can also help identify strategies to remain compliant, such as adjusting withholding or making estimated tax payments to prevent future liabilities. Proactively managing both current and future tax responsibilities helps maintain the benefits of an installment agreement and avoids unnecessary financial strain.