IRS Law Blog

You’ve made it – reached account resolution with the IRS by entering into an installment agreement to repay your taxes.  You may have had to negotiate with a local IRS Revenue Officer, or over the phone with the IRS automated collection service.  Maybe, you had minimal negotiations, made possible by qualifying for a streamlined installment agreement, which the IRS will automatically grant if you owe under $50,000 and can repay it in 72 months.

Make your payment every month, and the IRS will leave you alone.

But there are conditions to the installment agreement – it is not enough just to make your monthly payment.  You need to take one more step to keep the IRS off your back.  You have to stay in compliance on all future tax liabilities – filing on time, and paying on time.  Future compliance is a condition of your installment agreement.  To be perfectly clear, the IRS takes future compliance extremely seriously.

And this is real important:   Any future bill for any balance due can (and probably will) default your agreement.  And “balance due” does not just mean taxes; it also means penalties.

Here’s an example:  Let’s say you send in a check to the IRS to pay your taxes on October 15 when the return is due (with an extension).  The IRS does not consider this paying on time – your taxes were due on April 15; October 15 is an extension to file, not to pay.  What happens next?  The IRS cashes your check, determines that you paid your taxes but paid late, and sends you a bill for a late payment penalty.

This simple penalty bill for a late-payment penalty can be considered by the IRS as a new balance due and a basis for terminating your installment agreement (even though you paid your taxes).  And it does not matter how much the late-payment penalty is $100.00 or $10,000, either way, it is a new balance due.

The IRS computers should recognize the new penalty balance, and send you Notice 523, Notice of Intent to Terminate Your Installment Agreement.

To prevent new balances, here are two steps to take to ensure that your IRS installment agreement stays in good standing:

1.  If you are self-employed, make your quarterly estimated tax payments.  This helps you avoid two potential penalties:  one for failure to make estimated taxes, and one for not paying on time.

Paying estimated taxes can be tough – here is a solution:  Open a separate bank account, put the words “Estimated Tax Account” under your name on the account.  Use this account to separate your tax money from your spending money.

With your new estimated tax account set-up, let’s calculate how much you need to put in it.  To do this, we need to reference your last filed tax return.  Using the return, take your overall tax liability and divide your gross revenue.  This gives you a percent of how much of every dollar your customers pay you is an expense for taxes.  Usually, the rate is between 10-15%.

Now, every time you get paid by a customer or client, take that percent (10-15%) out of your bank account and transfer it to your new estimated tax account.  Every quarter, pay what you have escrowed in the estimated tax account to the IRS.

When you get paid, money is set aside so the IRS gets paid.

2.   If your installment agreement is for payroll taxes (Form 941), make sure you make your employment tax deposits on time.  An IRS penalty bill for late-deposit of your payroll taxes can also default your installment agreement.

The best way to to do this is to hire a third-party (payroll service) to handle your payroll for you.  Have them automatically debit the payroll taxes out of your bank account and pay them over to the IRS for you.

The “silent killer” of IRS installment agreements is a bill for penalties from a late-payment or late-filing.  Any new balance – whether a new tax, or just penalties, will default your agreement.  The IRS computers show no mercy in defaulting an installment agreement for a new balance, no matter how small.  The best way to prevent the default is awareness and then preventative action to ensure it does not occur.