If You Already Have an Installment Agreement and Expect to Owe Taxes, What Should You Do?
Learn how to manage your existing IRS installment agreement if you anticipate owing more taxes, ensuring compliance and avoiding penalties.
Taxpayers with an existing installment agreement who anticipate additional tax liabilities face a significant financial challenge. Addressing this situation promptly is critical, as it can affect financial stability and one’s relationship with the IRS.
Handling Additional Tax Balances
Owing additional taxes while under an installment agreement requires reassessing financial commitments. The IRS allows taxpayers to modify existing agreements to include new tax liabilities. IRS Form 9465 can be used to request changes or establish a new agreement, enabling taxpayers to propose revised monthly payments based on their updated financial circumstances.
A user fee applies to modifications, and the amount varies depending on the payment method, with direct debit agreements generally incurring lower fees. It’s important to account for interest and penalties on unpaid balances. As of 2024, the IRS charges 3% annual interest for underpayments, compounded daily. Additionally, under Internal Revenue Code (IRC) Section 6651, a failure-to-pay penalty of 0.5% per month applies to unpaid balances, up to a maximum of 25%. This penalty can be reduced if a taxpayer enters into and complies with an installment agreement. Promptly adjusting your agreement with the IRS minimizes these costs.
Updating Payment Terms
Modifying payment terms with the IRS can help taxpayers manage new tax liabilities without defaulting on their existing agreement. Options include adjusting monthly payment amounts or extending the payment period. These changes provide flexibility to recalibrate financial commitments while staying compliant.
To propose a realistic and sustainable plan, evaluate your cash flow, expenses, and financial obligations. The IRS reviews submitted financial information to determine the feasibility of changes, so ensure accuracy and transparency in your proposal.
Communicating with the IRS
Proactive communication with the IRS is essential when managing installment agreements and additional tax liabilities. Gather all relevant documents related to your existing agreement and new obligations, such as recent tax returns, financial statements, and IRS correspondence.
Contact the IRS through their installment agreement channels via phone or their website, where account modifications can often be made online. When speaking with an IRS representative, be clear, honest, and prepared to explain your situation, supported by documentation. This approach improves credibility and increases the likelihood of a favorable resolution.
Maintaining Annual Filing Requirements
Meeting annual filing requirements is critical to staying compliant under an installment agreement. Timely filing prevents penalties, such as the late filing penalty under IRC Section 6651(a)(1), which can reach 5% per month of unpaid taxes, up to a maximum of 25%.
Accuracy is equally important. Review your income, deductions, and credits carefully, and stay informed about tax law changes, such as those introduced by the Tax Cuts and Jobs Act. Keeping detailed records throughout the year simplifies the filing process and helps avoid discrepancies that could trigger audits or adjustments.
Consequences of Unchanged Agreements
Failing to address additional tax liabilities while under an installment agreement can lead to serious financial and administrative consequences. The IRS requires compliance with all agreement terms, including timely payments for both installments and new obligations. Defaulting on an agreement can result in the IRS revoking it, making the full balance immediately payable.
Default triggers collection actions, such as liens and levies. A federal tax lien can harm your credit score and restrict financing options, while a levy permits the IRS to seize assets, including wages and bank accounts. These actions increase financial strain and may involve additional costs, such as lien filing or levy processing fees.
Once an agreement defaults, negotiating new terms becomes more challenging. The IRS may impose stricter repayment conditions or require detailed financial disclosures. Taxpayers may also lose benefits like reduced failure-to-pay penalties, which are contingent on compliance. Addressing new tax liabilities promptly helps avoid these escalating consequences.