Installment Agreement cancellation

[LouD]

Client currently pays past taxes on an installment agreement and did not save up enough to pay this year's amount due in full right now - will have the rest ready in June.

I think that if you are not current in your taxes owed, the installment agreement becomes void - so I'm wondering if we file an extension on this year's return until he has all the money ready to pay, would that avoid any problems with the existing installment agreement. We don't want to have to go thru the trouble of getting another installment agreement since it's over $25k.

Thanks for any insights!

[BulldogTom]

That sounds like a good plan. It may or may not work. I am guessing it will because the IRS will have nothing to default the taxpayer on until the return arrives. And if it arrives with the check to pay the taxes due, you might slip through.

Tom

Lodi, CA

[JohnH]

It will work. I've done it with clients before. It isn't sneaky and it isn't against their rules. As long as you stay within their guidelines and remain cooperative, I've found IRS to be amazingly easy to deal with when it comes to unpaid taxes.

Don't fall into the trap of under-estimating the amount you think he will owe on the extension form, because that could potentially invalidate the extension retroactively if the return were ever audited. You should show the amount he actually expects to owe on line 4 of the extension form, then show what he is actually paying on line 7. One would think that this is revealing that he is not current on his taxes and thus would invalidate the installment agreement, but that is not the case. IRS works off the return when it is filed for the purpose of invalidating the installment agreement, so the info on the extension has no effect on the existing installment agreeement. Their policies and procedures are clearly designed to keep people in the system and to give them adequate time to get their financial affairs in order, if it's posisble to do so.

Now if he can't pay when he files the actual return, he can expect the installment agreement to be invalidated. However, even then he can request a new installment agreement rolling the two balances into one. This is as easy as getting the original installment agreement approved if he owes less than $25K in total. I've seen situations where the total was slightly higher than $25K, so I urged the client to pay enough on the new liablility to stay under $25K, then request the rollup. Even told the collections person what we had done when we spoke with them about the new installment agreement - no problems there either.

In your case, you said the original installment agreement is over $25K, so there are more hoops to jump through if he can't pay by Oct. However, I was told last fall by a collections person that even the $25K / 60 months isn't a hard & fast rule - in some cases they have flexiblity even when it doesn't meet their guidelines. This is accomplished easier over the phone than by using the form -as a matter of fact I suspect it's the only way to accomplish it.

[LouD]

Thanks JohnH for the comments - helps to have some positive stories on the extension. Good to know about the extension amounts being filled in correctly to avoid the invalidation of the extension.

Thanks again for the help - much appreciated!