One of the ways you can resolve your IRS tax liability is through an installment agreement (monthly payment plan). When you set up your installment agreement, the IRS requires that you include all of the tax years that you owe for in the installment agreement. So, for example, if you owe taxes, penalties and interest for 2005, 2006 and 2007, you must include all three years in the installment agreement. You could not set up an agreement for just 2006.
So, what happens if you have set up an installment agreement and you find yourself owing more tax this year than you can afford to pay back. Well, the simple answer is that you will be re-negotiating your installment agreement. If you file your taxes with a balance due and you are unable to pay that in full, you have defaulted on your installment agreement and if you take no action, the IRS could begin active collection activity against you. “Active collection” is best known as wage or bank levies/garnishments or seizure of assets.
When you’re in this situation, you should immediately call the IRS and let them know you owe for the current year and you need to include that on your tax return. You should have a copy of the tax return you filed handy so you can fax it to the IRS if necessary. Depending on the total amount you owe and how long ago you negotiated your payment plan, you may have to go through the whole process of sending in a financial statement and negotiating with the IRS for your payment plan, or, they may simply add that additional tax to your plan and let things carry on as usual. In my experience, however; the IRS always makes you present new financial information in the hopes that things have changed and they will be able to require a higher monthly payment in your installment agreement.