The life expectancy of an IRS payment plan
How long will your IRS payment plan last?
All is quiet between you and the IRS – you have a payment plan, and the IRS is will not be knocking on your door because your account is in resolution.
But IRS installment agreements do not necessarily last forever.
And that can be both a good and bad thing.
The good part of an IRS payment plan is that the IRS has 10 years to collect a tax debt from you. That means that your payment plan will eventually end – to your benefit.
This is called the IRS 10 year statute of limitations on collections. After the 10 years are up, the IRS is legally prevented from continuing to collect from you. To implement the law, the IRS gives you a credit for the what you owe them. In other words, if you owe them $50,000, they put a $50,000 credit on your account, clearing your balance to zero.
The credit the IRS gives you when the 10 years are over also ends your payment plan. That’s because you no longer owe them any money. There is nothing to pay – hence, your payment plan is over, wiped clean along with the money owed to the IRS.
But the IRS can also end your payment plan before the statute of limitations is over. If they do that, a new payment plan would need to be negotiated.
Here are the most likely reasons for the IRS to terminate your installment agreement before it is over:
1. You did not stay in compliance with your IRS filing and payment requirements. All IRS installment agreements require future compliance. In other words, to keep your payment plan, you have to file all tax returns on time, and pay all of your taxes. There cannot be any new money owed to the IRS. The IRS requires the reasons you needed the payment plan – maybe some unfiled returns, and unpaid taxes – not to occur again. If it does, they will send a notice of intent to terminate your installment agreement, put you back in the IRS collection queue, and require you to contact them to negotiate a new agreement.
2. Your income went up since the IRS agreed to the payment plan. You know what that means – the IRS wants you to pay more. The IRS knows if your income went up – after all, they get your tax returns every year. If your return indicates that your income has gone up since you entered into the installment agreement, the IRS could contact you and request that you provide them with a new financial statement. The point is obvious – your income goes up, and the IRS wants to get paid accordingly.
3. Your current payment is not calculated to pay the IRS back before the 10 year collection statute ends. The IRS calls this a partial payment installment agreement. By law, it’s okay if your payment plan will never pay the IRS off. But, the law also requires the IRS to review these partial payment plans every two years.
Example: You owe the IRS $50,000, and they agreed to give you a payment plan at $200/month. Let’s say the IRS has three years left to collect on the 10 year statute. After two years of payments, it is likely you will hear from the IRS to again review your finances to set a new payment plan for the remaining year they have to collect. You could very possibly get that same $200/month payment back. But the IRS wants to keep an eye on things when your debt is more than you can pay, and that means a two year review. But keep mind in this example, your new payment would last only another year. (The IRS had three years left, and contacted you after you had paid for two years and only one year was left.)
4. You did not make a payment on time. A condition of keeping a payment plan in good standing with the IRS is making all payments on time. If a payment is missed, the IRS has the right to terminate the agreement, and force you to start over with a new agreement.
Some good advice: If you are struggling to make your payment, it is best to stay ahead of the IRS, and contact them as early as possible and let them know. In most situations, the IRS will actually let you skip a month’s payment if you call them with a financial hardship – giving you some relief until the next payment is due if the problem is temporary.
If your inability to make payments is more long-term, then a call before the IRS collection machinery kicks into gear with defaulted installment agreement letters will best protect your wages, accounts, and assets from IRS levy action. By providing the IRS with details on your financial hardship, they can place your account in currently uncollectible status and not require you to make any payments. Alternatively, an offer in compromise could be considered as settlement if you could never repay the amount you owed to the IRS.
IRS payment plans do end when the IRS 10 year statute of limitations is over. But there are potential minefields along the way, like staying in compliance with your filing and payment requirements, and possible IRS renegotiation of your installment agreement if they think your income is going up. On top of that, if your payment is not enough to ever pay the IRS back – well that’s okay, but expect them to want to review your finances every two years.
All said, it is good to know all about IRS payment plans so the playing field ahead of you is clear.