When taxpayers are unable to pay their tax debt in full, the IRS installment agreement program provides a practical solution. Rather than facing aggressive collection tactics such as bank levies or wage garnishments, a taxpayer can enter into a payment plan and make manageable monthly payments. As long as the taxpayer complies with the terms of the agreement, the IRS typically suspends enforced collection activity, making installment agreements one of the most widely used IRS tax-relief options.
However, the protection offered by an installment agreement is not guaranteed. If you stop making payments or fail to remain compliant with your ongoing tax obligations, the IRS can place your agreement into default. A default signals to the IRS that you’re no longer upholding your end of the deal, and it puts you at risk of having the agreement terminated entirely.
Whether you have already received a default notice or are worried about falling behind due to financial hardship, understanding how default works and how to fix it is critical.
Key Takeaways
- An IRS installment agreement allows taxpayers to pay off tax debt over time while avoiding enforced collection activity.
- Your agreement can go into default if you miss payments or fail to meet other compliance requirements.
- The IRS typically issues a CP523 Notice to alert you that your agreement may be terminated.
- You usually have 30 days from the date of the notice to fix the issue and restore your agreement.
- If the agreement is terminated, the IRS can resume collection actions such as wage garnishments, bank levies, and federal tax liens.
- Options exist to reinstate the agreement, including paying missed installments, resolving new balances, or appealing through the Collection Appeals Program.
Why Is My Installment Agreement in Default?
The IRS may place your installment agreement in default for a variety of reasons. Here are the most common triggers:
Missed or Late Installment Payments -Failing to make the full required payment by the due date is the primary reason agreements default. Even one missed payment can start the default process if not resolved quickly.
New tax debt-An installment agreement covers past-due debt, not a new tax year. If you file future returns and do not pay those taxes in full and on time, you become non-compliant.
Submitting False or Incomplete Information – If the IRS learns that the financial information used to secure the agreement was inaccurate or misleading, the agreement can be revoked.
Failure to Provide Requested Financial Information-For some agreements, especially those requiring a full financial disclosure (Form 433-A or 433-F), the IRS may periodically request updated financials to confirm your continued ability to pay.
Not Paying Increased Monthly Installments After Review -You fail to pay a modified payment amount based on updated financial information.
What Happens If I Default on My IRS Installment Agreement?
Any of these actions may indicate that you defaulted on your IRS installment agreement and that your agreement may be terminated. However, termination does not happen right away. In most cases, the IRS will let you know that you are in violation of the terms of your agreement with a CP523 Notice. Then, you’ll have 30 days to comply with the agreement before it’s terminated. During this time, your agreement is considered to be a “defaulted agreement,” but it is not terminated.
Will the IRS Reinstate My Installment Agreement?
It is possible to reinstate an installment agreement that is in default by correcting the issue that caused the default within 30 days. You can do this in several ways, such as:
- Pay any payments you missed.
- Providing any financial information the IRS requests.
- Paying any additional tax liabilities.
- Adding any additional tax liabilities to your existing installment agreement, as long as it doesn’t extend the agreement by more than 2 months.
- Meeting streamlined criteria for an installment agreement if you have not defaulted on an installment agreement in the 12 months prior to the current default.
You may also request a Collection Appeals Program (CAP) hearing to appeal your default or termination. If you do not work with the IRS to have the agreement reinstated, the agency will terminate your agreement. Collections activities, such as a levy, will resume within 90 days from the date the IRS mailed the default notice.
If you defaulted on your IRS installment agreement or think you may be in danger of default, it’s important to get back on track as soon as possible. For more information about IRS installment agreements and possible solutions when your agreement is in default, contact East Coast Tax Consulting Group.
Frequently Asked Questions About Defaulted IRS Installment Agreements
How do I know if my IRS installment agreement is in default?
The IRS typically sends a CP523 Notice when your agreement is in default or is about to be terminated. This notice explains why you are in default and provides a 30-day window to correct the issue. You may also see alerts through your IRS online account.
What is the most common reason installment agreements go into default?
The most common reason is missing a required monthly payment. Even a single missed payment can put the agreement into default if it is not resolved promptly.
Does switching banks affect my installment agreement?
It can. If you are enrolled in a direct debit installment agreement, changing bank accounts without notifying the IRS may cause a payment to fail, triggering default.
What happens if my installment agreement is terminated?
Once terminated, you lose protection against enforcement action. The IRS may begin bank levies, wage garnishments, and enforcement of federal tax liens. Termination also makes future negotiations more difficult.
Can I reinstate my installment agreement if I default more than once?
It is possible, but the IRS may scrutinize the request more closely. You may be required to submit extensive financial documentation or agree to higher monthly payments. Persistent defaults can lead the IRS to demand alternative resolution strategies.
Can I add new tax debt to my existing installment agreement?
Yes, but only under certain conditions. The IRS may allow new balances to be combined with your current agreement if doing so does not significantly extend the repayment period. If the new balance is too large, you may need a new agreement.
What if I cannot afford the reinstated monthly payment amount?
If financial hardship exists, you may be eligible for a modified agreement, a Partial Pay Installment Agreement, or Currently Not Collectible status. In extreme cases, you may also explore an Offer in Compromise to settle for less than what you owe.
Will defaulting hurt my credit score?
The IRS does not directly report to credit bureaus. However, if a Notice of Federal Tax Lien is filed, credit reporting agencies may receive that information from public records, which can negatively affect creditworthiness.
How long do I have to fix a default once I receive the CP523 Notice?
You generally have 30 days from the date of the notice to address the issue and request reinstatement. Acting quickly improves your chances of resolving the problem before termination.
Can I appeal if the IRS refuses to reinstate my agreement?
Yes. You may request a Collection Appeals Program (CAP) hearing to challenge the default or termination decision. A CAP appeal pauses enforced collection while your case is reviewed by an independent IRS appeals officer.
Should I hire a tax professional if I default?
While some situations are simple enough to resolve independently, professional help can be extremely valuable if you are facing levies, struggling with multiple tax years, or dealing with complex financial circumstances. A tax professional can negotiate with the IRS, prevent enforcement actions, and help determine the best long-term strategy.