Owing Again While on an IRS Payment Plan: How to Keep a New Balance From Killing It

Here is the pattern I see more than any other. Someone sets up a payment plan for two old tax years. They make every payment. Then they file next year's return, it shows a balance they cannot pay, and a few weeks later a CP 523 arrives saying the plan is in default. The payments were perfect. The new year sank it.

That is not the IRS being unfair. It is written into the statute, and the IRS tells you about it when you sign up. Here is how it works, and how to stay out of it.

The rule

IRC 6159(b)(4)(B) lets the IRS alter, modify or terminate an agreement if the taxpayer fails to pay any other tax liability when it is due. IRM 5.14.11.3 lists it as one of the five reasons the IRS may propose termination, and notes it includes related accounts for the same taxpayer, such as a sole proprietorship and the owner's individual return, or a partnership and a partner.

The campus procedures make sure you hear about it. IRM 5.19.1.6.4.16 tells employees to advise taxpayers, verbally or in writing, that the agreement is terminated when additional liabilities are incurred, and that all subsequent returns must be filed and paid on time. The same rule appears in the agreement itself: you agree to comply with the tax laws while the agreement is in effect. For a guaranteed agreement, that promise is part of the statute, IRC 6159(c)(5).

Estimated tax: not a default, but a trap

The IRS used to default agreements for missed estimated tax payments. It no longer does. IRM 5.19.1.6.4.17 states that IRC 6159 does not allow an agreement to default for non-payment of estimated tax, so the IRS continues to make estimated payments a condition for granting an agreement but no longer monitors and defaults agreements for missing them.

That sounds like relief. It is mostly a delay. If you are self-employed and skip estimated payments, nothing happens during the year. Then you file, the return shows a balance, and the balance is a new liability you did not pay when due. That is a listed reason for default. The IRM tells employees to advise taxpayers of exactly this: a new balance due will cause the agreement to default.

Prevention: fix the cause before you sign

Every installment agreement starts with compliance. IRM 5.14.1.4.2 says filing compliance and payment compliance are prerequisites to any agreement, and that individuals must be current with withholding or estimated tax payments. It also tells employees to analyze the current year's anticipated liability, and if it looks like you will owe at year end, to include that accrued liability in the agreement.

Use that rule. If your withholding is short this year, you can ask the IRS to fold the expected balance into the plan now, rather than waiting for it to blow up the plan next spring. The IRM has an agreement code for exactly this situation, for agreements that include unassessed periods.

Then fix the cause.

• Wage earners: submit a new Form W-4 to your employer. IRM 5.14.1.4.2 tells revenue officers to emphasize adjusting the W-4 when withholding is insufficient, and even to prepare a new one with the taxpayer during an in-person meeting.
• Self-employed: make quarterly estimated payments, and treat them as a bill as fixed as the plan payment itself.
• Two jobs, a working spouse, or side income: these are the classic sources of an unexpected balance. Run a withholding check after any change.

When you owe anyway: add it to the plan

Despite your best efforts, the return comes out owing. Do not wait for the default notice. IRM 5.19.1.6.4.17 says that if a taxpayer owes on the next year's return and wants it added to the existing agreement, the taxpayer needs to submit a new request to include the liability at the time the return is filed.

IRM 5.19.1.6.4.20 describes how the IRS adds a new liability to an existing agreement. On a phone call the IRS will first ask for full payment of the new amount. If you cannot pay it, the new balance can be added if you still meet the agreement criteria. If the combined account still meets Simple Payment Plan criteria, no financial statement is needed. If it does not, the IRS will use a financial statement less than a year old if nothing has changed, update it if something has, or prepare a new one.

The IRS does not wait for the new year to be assessed. The IRM lets employees include an unassessed balance as a pre-assessed module when the taxpayer has received a CP 2000 proposed adjustment and confirms the amount, or when the return is received and the taxpayer knows the balance. If the return has not been received and normal processing time has passed, you will be asked to resubmit it.

Related accounts count

The new balance does not have to be on the same tax return. IRM 5.14.11.3 says the failure to pay another liability includes related taxpayer identification numbers, such as a sole proprietorship and the owner's individual account, or a partnership and a partner. A sole proprietor whose payroll deposits fall behind can default the personal income tax plan.

The flip side is that related accounts can share one plan. IRM 5.14.4.3 allows related entities in one agreement, including a sole proprietorship's taxes with the sole owner's individual income taxes, and taxes owed by a married couple even when owed individually. If you have a personal balance and a business balance, ask for one agreement that covers both, so a problem on one side does not surprise you on the other.

Fees and the two-payment rule

Adding a liability is a revision, so a fee may apply: a revision fee if the account is in installment agreement status, an origination fee if it has already dropped back into regular collection. But the IRM waives the fee in several situations, including when the new balance can be paid within two additional payments, when the account balance is below the IRS's internal deferral level, and when the addition is $200 or less. Low-income taxpayers on direct debit pay no fee.

The two-payment idea shows up on the field side too. IRM 5.14.11.5 lets a revenue officer reinstate a plan defaulted by a new liability, without managerial approval or a new financial statement, if adding that liability results in no more than two additional monthly payments and does not extend the plan past the collection statute expiration date.

Do not stack two plans by accident

If you send a Form 9465 for the new year while an old plan is running, be clear about what you are asking for. IRM 5.19.1.6.4.20 tells employees not to stack agreements, meaning add two proposals together, unless the taxpayer clearly intends it. The IRM's example: a taxpayer paying $200 a month files a new return with a balance and sends a Form 9465 proposing $100 a month. The employee is supposed to call and ask whether the taxpayer means $100 total or $100 more, $300 total. Say which you mean in writing on the form.

If the default notice already came

You have options. IRM 5.19.1.6.4.19 says that if you correct the reason for default within 45 days of the CP 523, for example by paying the new balance in full, the IRS reinstates the agreement. If you cannot pay the new balance, ask to add it to the plan before the 30-day termination date. The details are in what a CP 523 default notice means and reinstating a defaulted payment plan.

A payment plan is a deal about the past. The IRS will keep that deal as long as you keep the present clean. Spend ten minutes on withholding or estimates now, and the plan you set up this year is the one you finish.