You thought your IRS tax problem was finally under control.
You owed thousands of dollars in back taxes, but you worked out a monthly payment arrangement with the Internal Revenue Service.
You started making payments.
For a while, everything seemed manageable.
Then something changed.
Maybe your income declined.
Maybe your business experienced financial difficulties.
Maybe an unexpected medical expense made it impossible to keep up with your payments.
Or perhaps you filed another tax return and discovered that you owed additional taxes you could not afford to pay.
Now the IRS is threatening to terminate your payment plan.
You may have received a notice stating that your IRS Installment Agreement is in default or will be terminated.
And suddenly, the tax problem you thought you had resolved is becoming an emergency again.
If your IRS payment plan is about to be terminated, do not ignore the notice.
Once an installment agreement is terminated and the applicable legal requirements have been satisfied, the IRS may resume enforced collection, including bank levies and wage garnishments.
But losing your payment arrangement does not necessarily mean you have no options.
Depending upon your circumstances, you may be able to reinstate the agreement, negotiate different payment terms, or pursue another IRS tax-resolution alternative.
The important thing is to act before the IRS resumes collection.
What Happens When You Default on an IRS Installment Agreement?
An IRS Installment Agreement allows qualifying taxpayers to pay outstanding federal tax liabilities through monthly payments.
While an installment agreement remains in effect, the IRS generally cannot levy to collect the taxes covered by that agreement, subject to statutory exceptions.
However, taxpayers must comply with the agreement’s terms.
An installment agreement can default for several reasons, including:
- Missing required monthly payments
- Failing to file required tax returns
- Failing to pay new tax liabilities
- Failing to make required estimated tax payments
- Providing inaccurate financial information
- Failing to provide requested updated financial information
- Violating other conditions of the agreement
If the IRS determines that an agreement is in default, it may begin the process of terminating the arrangement.
That can expose the taxpayer to renewed collection activity.
Received IRS Notice CP523? Do Not Ignore It.
One of the most important notices in this situation is IRS Notice CP523.
CP523 generally informs taxpayers that the IRS intends to terminate their installment agreement because of a default.
The notice explains the reason for the proposed termination and provides information about how to respond.
This is not simply another reminder to make a monthly payment.
It is a warning that the payment arrangement protecting you from certain collection actions may be ending.
Taxpayers should carefully review the notice, identify the reason for the proposed termination, and determine the applicable response deadline.
Under the general statutory rules, the IRS must provide notice before terminating an installment agreement for certain defaults.
The taxpayer generally has 30 days to address the proposed termination or request administrative review.
Do not assume that every notice provides the same deadline or that the date you opened the letter controls.
Read the actual notice and act promptly.
Can the IRS Levy My Bank Account After Terminating My Payment Plan?
Yes, once the applicable statutory requirements are satisfied.
A valid installment agreement generally restricts IRS levy action for the taxes covered by the agreement.
Federal law also generally prohibits levy during certain periods surrounding proposed termination, termination, and timely appeals.
However, those protections are not indefinite.
Once the agreement has been terminated and the applicable waiting periods and procedural requirements have expired, the IRS may resume collection.
Depending upon the circumstances, this can include:
Bank levies. The IRS may levy funds held in financial accounts.
Wage levies. The IRS may direct an employer to send the nonexempt portion of wages to the government.
Other collection actions. The IRS may pursue other property or rights to property under applicable law.
A terminated installment agreement does not necessarily mean that a levy will occur immediately.
But it can remove an important protection against enforced collection.
What If I Cannot Afford My IRS Monthly Payment Anymore?
This is one of the most important situations to address before a payment plan defaults.
Suppose you owe the IRS $125,000.
You previously agreed to pay $2,000 per month.
At the time, the payment seemed manageable.
But your circumstances have changed.
Perhaps you lost your job.
Perhaps your business revenue declined.
Perhaps your household is facing substantial medical expenses.
Now you can afford only $500 per month.
Continuing to promise the IRS $2,000 when you cannot realistically pay it may simply lead to another default.
An installment agreement should reflect an appropriate resolution strategy, not an unrealistic payment promise.
Depending upon the circumstances, the IRS may consider updated financial information when evaluating a revised arrangement.
The taxpayer may need to provide information concerning income, expenses, assets, and liabilities.
The objective should be to determine whether the existing agreement can be modified or whether another collection alternative is more appropriate.
Can I Reinstate a Defaulted IRS Installment Agreement?
Potentially.
The IRS may permit an installment agreement to be reinstated when the taxpayer addresses the reason for the default and satisfies applicable requirements.
For example, a taxpayer who missed a payment may be able to resolve the default and request reinstatement.
However, reinstatement is not guaranteed.
The IRS may review the taxpayer’s compliance history, outstanding liabilities, financial circumstances, and other relevant factors.
Depending upon the situation, the taxpayer may need to:
- Address missed payments
- File missing tax returns
- Pay or incorporate new tax liabilities
- Provide updated financial information
- Establish current tax compliance
- Agree to revised payment terms
If you have received a proposed termination notice, it is generally better to address the problem before the agreement is actually terminated.
What If I Owe New Taxes While Already on an IRS Payment Plan?
This is a common problem.
A taxpayer enters into an installment agreement for prior-year tax liabilities.
Then the next tax return is filed.
Unfortunately, the taxpayer owes additional taxes.
This can jeopardize the existing agreement.
The IRS generally expects taxpayers to remain current with ongoing filing and payment obligations while an installment agreement is in effect.
For self-employed taxpayers and business owners, this can be especially challenging.
A taxpayer may be making monthly payments toward old tax liabilities while simultaneously struggling to pay current estimated taxes.
The result can be a cycle:
Old tax debt leads to an installment agreement.
New tax debt causes the agreement to default.
The IRS demands additional payments.
The taxpayer cannot afford the combined obligations.
Collection enforcement becomes a possibility again.
If this describes your situation, simply reinstating the same agreement without addressing the underlying cash-flow problem may not provide a lasting solution.
What If the IRS Wants a Monthly Payment I Cannot Afford?
The IRS may request financial information to determine what the taxpayer can reasonably pay.
Depending upon the case, this may involve forms such as:
- Form 433-A
- Form 433-F
- Form 433-B
These forms help the IRS evaluate the taxpayer’s financial circumstances.
The IRS may examine:
- Wages and business income
- Bank accounts
- Retirement accounts
- Investments
- Real estate
- Vehicles
- Business assets
- Housing expenses
- Transportation expenses
- Health insurance
- Medical expenses
- Other necessary living expenses
The IRS also uses Collection Financial Standards when evaluating certain expenses.
This can create disputes when the taxpayer’s actual monthly expenses exceed amounts the IRS ordinarily allows.
A careful financial analysis can be important when determining whether a proposed monthly payment is realistic and consistent with applicable IRS collection procedures.
What Is a Partial Payment Installment Agreement?
Some taxpayers can afford monthly payments but cannot fully pay their IRS liabilities before the applicable collection period expires.
In appropriate circumstances, they may qualify for a Partial Payment Installment Agreement, commonly called a PPIA.
Under this arrangement, the taxpayer makes monthly payments based upon the applicable financial analysis, even though those payments may not fully satisfy the tax liability before the collection statute expires.
The IRS may periodically review the taxpayer’s financial circumstances.
For taxpayers who have defaulted on an unaffordable installment agreement, a PPIA may be worth evaluating.
However, qualification depends upon the taxpayer’s assets, income, expenses, compliance, and other circumstances.
Could I Qualify for Currently Not Collectible Status?
Possibly.
If paying the IRS would prevent you from meeting necessary living expenses, the IRS may determine that your account qualifies for Currently Not Collectible, or CNC, status.
CNC generally suspends active collection while the taxpayer is experiencing qualifying financial hardship.
It does not eliminate the tax liability.
Penalties and interest may continue to accrue, and the IRS may periodically review the taxpayer’s financial situation.
Nevertheless, for someone who has lost income or experienced serious financial difficulties, CNC may be more appropriate than an installment agreement the taxpayer cannot afford.
Could an Offer in Compromise Be a Better Solution?
An Offer in Compromise (OIC) may allow qualifying taxpayers to settle federal tax liabilities for less than the full amount owed.
Not everyone qualifies.
The IRS generally evaluates the taxpayer’s assets, equity, income, allowable expenses, and future ability to pay.
For a taxpayer who has repeatedly defaulted on installment agreements because the overall tax debt is unaffordable, an Offer in Compromise may be worth considering.
However, an OIC should not be submitted merely to delay collection.
It should be pursued when the taxpayer’s financial circumstances support eligibility.
What If the IRS Already Terminated My Installment Agreement?
If your installment agreement has already been terminated, determine where the case stands immediately.
Important questions include:
When was the agreement terminated?
What caused the default?
Have you received a CP523 notice or other collection notices?
Are administrative appeal rights still available?
Has the IRS issued a Final Notice of Intent to Levy?
Is an IRS Revenue Officer assigned to the case?
Have bank or wage levies already been issued?
Are all required tax returns filed?
Can you afford a revised monthly payment?
Would another collection alternative be more appropriate?
The answers can affect which procedures and remedies remain available.
Can I Appeal the IRS’s Decision to Terminate My Payment Plan?
Yes, qualifying installment-agreement termination decisions may be appealed through the IRS Collection Appeals Program (CAP).
A timely appeal can provide an opportunity to challenge the termination and present relevant information.
The applicable deadlines and procedures depend upon the notice and circumstances.
Under federal law, certain levy restrictions apply while qualifying installment-agreement appeals are pending.
However, taxpayers should not assume that every communication with the IRS automatically constitutes a timely appeal or prevents collection.
If your notice provides appeal rights, pay close attention to the deadline.
What If an IRS Revenue Officer Is Handling My Case?
A Revenue Officer may become involved when the IRS is actively pursuing collection of a delinquent liability.
Revenue Officers can request financial information, investigate assets and income, establish filing deadlines, and pursue authorized collection action.
If your installment agreement has defaulted and a Revenue Officer is assigned, the situation may require particular attention.
The Revenue Officer may want to know:
- Why the agreement defaulted
- Whether the taxpayer is currently compliant
- What assets are available
- What monthly payments are affordable
- Whether another collection alternative is appropriate
Ignoring the Revenue Officer can make the situation more difficult.
Business Owners: Defaulting on an IRS Payment Plan Can Be Especially Serious
Business taxpayers may face additional challenges.
A business may owe federal employment taxes, income taxes, or other liabilities.
If the business defaults on an installment agreement, renewed collection can potentially affect operating bank accounts, receivables, and other assets.
When unpaid payroll taxes are involved, the IRS may also investigate whether responsible individuals should be personally liable for unpaid trust fund taxes through the Trust Fund Recovery Penalty.
For a business owner, the consequences can extend beyond the company’s balance sheet.
If your business cannot maintain its IRS payment arrangement, the underlying problem should be addressed before collection disrupts operations.
What Should You Do If Your IRS Payment Plan Is About to Default?
If you cannot make your next IRS payment, do not simply stop paying and ignore the consequences.
Instead:
- Determine the exact amount and due date of the required payment.
- Review the terms of your existing installment agreement.
- Determine whether you owe additional taxes.
- Confirm that required returns have been filed.
- Evaluate your current financial circumstances.
- Determine whether a revised agreement may be appropriate.
- Consider whether a PPIA, CNC status, or OIC may be available.
- Review any CP523 notice and applicable appeal deadlines.
- Address the situation before the IRS resumes enforced collection.
The appropriate response depends upon the particular case.
But waiting until the agreement has been terminated can reduce the time available to address the problem before collection resumes.
Indiana Tax Attorney for Defaulted IRS Installment Agreements
I am Eric C. Keuling, founder of the Keuling Law Firm, and I have more than 18 years of tax and tax-resolution experience.
Before founding my law practice, my tax career included serving as a Tax Director with Grant Thornton in Tokyo, Japan.
I also earned an LL.M. in Taxation from the University of Florida Levin College of Law.
Today, I represent individuals and businesses throughout Indiana in tax matters involving the Internal Revenue Service and Indiana Department of Revenue.
My tax-resolution practice includes:
- Defaulted IRS Installment Agreements
- IRS payment plan reinstatement
- IRS Notice CP523
- IRS Installment Agreement modifications
- Partial Payment Installment Agreements
- Offers in Compromise
- Currently Not Collectible status
- IRS back taxes
- Large federal tax debts
- Federal tax liens
- IRS bank levies
- IRS wage garnishments
- IRS Revenue Officer representation
- Collection Due Process hearings
- Collection Appeals Program matters
- Penalty abatement
- Unfiled and delinquent tax returns
- Tax preparation and compliance assistance
- Business and payroll tax liabilities
- Trust Fund Recovery Penalties
- Indiana Department of Revenue collection matters
When you hire the Keuling Law Firm, I personally handle your tax matter.
Your case is not sold by one person and then handed to a case manager.
I work directly with you to review your IRS liabilities, evaluate the status of your installment agreement, analyze your financial circumstances, communicate with the IRS, and determine which resolution options may be appropriate.
IRS Threatening to Cancel Your Payment Plan? Don’t Wait Until Collection Resumes.
If the IRS has notified you that your installment agreement is in default, the situation deserves immediate attention.
The agreement that previously provided protection against certain collection actions may be ending.
Once the applicable legal requirements are satisfied, the IRS may resume enforced collection.
That can mean bank levies, wage garnishments, and other collection measures.
But a defaulted payment plan does not necessarily mean you have no options.
Depending upon your circumstances, you may be able to reinstate the agreement, negotiate revised terms, appeal the proposed termination, or pursue another IRS tax-resolution alternative.
If you have received an IRS CP523 notice, missed payments, or can no longer afford your monthly IRS payment plan, contact the Keuling Law Firm to schedule a consultation.
I can review your installment agreement, determine where the IRS collection process stands, evaluate your financial circumstances, and help identify potential strategies for addressing the default and resolving your tax debt.
Don’t wait until your bank account is levied or your wages are garnished to find out whether your IRS payment plan can be saved.
This article is provided for general informational purposes only and does not constitute legal or tax advice. IRS installment-agreement defaults, termination procedures, appeal rights, levy restrictions, financial evaluations, and collection alternatives depend upon applicable law, IRS procedures, and each taxpayer’s particular circumstances.