Question: I currently have a an installment payment plan for my 2005 taxes and have paid most of it off. I’ve just filed my taxes and the amount owed is more than expected. If I were to pay the balance for my ‘05 taxes, would I be able to set up a new installment plan for my 07 taxes?
Answer: Thanks so much for your question. When you file your 2007 income tax return with a balance due, the IRS system will automatically default your current installment agreement since one of your “agreements” when you set up the installment agreement was to remain current with all of your tax filings and payments.
Depending on the amount you will owe for 2007 it may or may not be a difficult chore to get your installment agreement reinstated. If you have the money to pay off your 2005 liability, I would recommend paying that liability off in full. Who wants to owe the IRS money and pay that crazy interest rate anyway? Then, you should send in an installment agreement request with your 2007 federal income tax return. If you have already filed your tax return you can wait until the IRS sends you a notice, or you can go ahead an call the collections department and tell them you want to set up an installment agreement. The earlier you can set up a payment plan, the better you will be in the long run because it will reduce the total amount of interest that you will pay. Even if you do not have a formal agreement set up you can begin making “voluntary” payments now to reduce the total amount of the liability and the interest. If you owe less than $10,000 overall, it will not be a big deal for the IRS to set up your installment agreement. When you owe less than $25,000 the IRS does not require that you prepare a financial statement (discussed below).
If you total due is over $25,000 then the IRS will require you to fill out a financial form, 433-A, and the difference between your monthly income and allowable expenses will determine your payment amount and if there are assets with significant equity, the IRS will require that you attempt to borrow against that equity or liquidate assets to pay them off.
Bottom line: The IRS will set up a payment plan for you for your new 2007 tax liability. How much you have to pay them each month will depend on the factors set out above.
Finally, as a disclaimer, I need to do my ethical duty as an attorney and let you know that this blog is meant to provide general tax and legal information and not specific information for your particular situation. You should always consult a competent attorney or tax professional to discuss the specifics of your case.
