An IRS installment agreement default can place your bank accounts, wages, and other assets at renewed risk of collection. If you have an approved IRS payment plan but fail to satisfy its terms, the Internal Revenue Service may begin the process of terminating that agreement.
However, an installment agreement default does not necessarily mean the IRS can immediately seize your money or garnish your wages. Federal law establishes important rules governing proposed terminations, appeal rights, and restrictions on IRS levy enforcement.
The distinction matters. A payment plan that is in default status is not necessarily the same as an agreement that has already been terminated.
At GMD Tax Law, I represent Massachusetts individuals and business owners dealing with IRS installment agreement problems, including default notices, unaffordable monthly payments, and threatened collection enforcement.
I am Gregory M. Dzialo, Esq., LL.M. in Taxation, and I work directly with clients to evaluate their IRS collection matters and available legal options.
What Is an IRS Installment Agreement Default?
An IRS installment agreement is a formal arrangement allowing eligible taxpayers to pay outstanding federal tax liabilities over time.
When an installment agreement is approved, the taxpayer agrees to satisfy specified payment and compliance requirements. In exchange, the IRS generally agrees to accept payments under the arrangement rather than immediately pursuing full collection of the covered tax liabilities.
When a taxpayer fails to satisfy applicable terms, the agreement may enter default status.
Importantly, default and termination are not necessarily simultaneous events. In ordinary cases, the IRS must provide notice of a proposed termination and observe applicable procedural requirements before terminating the agreement.
The consequences depend on why the agreement defaulted, its current status, the taxpayer’s outstanding liabilities, and any collection enforcement already underway.
For background on how these arrangements operate, read my article What Is an IRS Installment Agreement?
What Causes an IRS Installment Agreement Default?
An IRS payment plan can default for several reasons. Missing a monthly payment is perhaps the most familiar, but it is not the only one.
Under Internal Revenue Code Section 6159 and applicable IRS collection procedures, circumstances that may support a proposed termination include:
- Missed monthly payments: The taxpayer fails to make a required installment payment under the agreement.
- New unpaid federal taxes: Additional tax liabilities arise and are not paid as required.
- Failure to provide financial information: The taxpayer does not furnish requested financial information necessary for review of the agreement.
- Inaccurate or incomplete financial information: Information provided in connection with the agreement is subsequently determined to have been materially inaccurate or incomplete.
- Failure to meet modified payment terms: The taxpayer does not satisfy applicable revised payment requirements following an authorized financial review.
Outstanding filing obligations and failures to remain current with estimated taxes or federal tax deposits can also create serious compliance problems affecting an installment agreement.
Can You Default Even If You Make Every Monthly Payment?
Yes.
This is an especially important issue for self-employed taxpayers and business owners.
Consider a taxpayer who owes $60,000 for previous federal income tax years and enters into an installment agreement requiring monthly payments of $750.
The taxpayer makes every scheduled payment. However, the following year, the taxpayer files a federal income tax return showing an additional $12,000 liability that remains unpaid.
That new tax debt may jeopardize the existing payment arrangement, even though the taxpayer has consistently paid the agreed $750 per month.
Similar problems can occur when a business incurs new unpaid federal employment taxes or fails to remain current with applicable federal tax deposits.
An IRS installment agreement ordinarily requires ongoing tax compliance, not merely payment of an older balance.
IRS Installment Agreement Default: What Happens Next?
When the IRS determines that an installment agreement is in default, it generally follows procedures for notifying the taxpayer and proposing termination.
The process commonly involves the following stages:
1. The IRS Identifies a Default
The IRS determines that the taxpayer has failed to satisfy one or more applicable requirements of the installment agreement.
This may result from missed payments, additional unpaid liabilities, or another compliance issue.
2. The IRS Issues a Proposed Termination Notice
In many cases, the IRS issues Notice CP523, which advises that the installment agreement is in default and that the agency intends to terminate it.
Certain cases may involve a different notice or letter, including Letter 2975.
The notice identifies the default issue and explains the proposed consequences.
3. The Proposed Termination Period Runs
The IRS generally provides a 30-day period following the proposed termination notice before the agreement is terminated.
During this period, applicable legal protections and administrative remedies may remain available.
4. The IRS May Terminate the Agreement
If the default is not resolved and no applicable procedural protection prevents termination, the IRS may terminate the installment agreement.
At that point, the taxpayer may face a substantially different collection situation.
However, the IRS generally remains subject to statutory restrictions on levy enforcement for a period following termination.
What Does IRS Notice CP523 Mean?
IRS Notice CP523 is a warning that the IRS intends to terminate an installment agreement. It also provides notice concerning possible levy enforcement.
Receiving CP523 is serious because it indicates that the taxpayer’s existing payment arrangement is at risk.
The notice may concern a missed monthly payment, a new unpaid liability, or another failure to satisfy the terms of the agreement.
Generally, CP523 provides a 30-day period associated with the proposed termination. It also advises taxpayers of applicable appeal rights.
However, the issuance of CP523 does not necessarily mean that the installment agreement has already been terminated on the date of the notice.
The status of the agreement, the reason for default, and the applicable deadlines should be evaluated carefully.
For taxpayers who have previously experienced IRS collection enforcement, a CP523 notice can be particularly concerning because termination may eventually expose bank accounts, wages, and business assets to additional collection action.
Can the IRS Levy Your Bank Account After an Installment Agreement Default?
Potentially, yes. But the timing is important.
Internal Revenue Code Section 6331(k) generally restricts the IRS from making levies to collect liabilities covered by an installment agreement while the agreement remains in effect.
Federal law also generally prohibits new levies for those liabilities during specified periods involving proposed termination, termination, and timely administrative appeals.
In particular, the IRS generally may not issue a levy for covered liabilities during the 30 days following termination of an installment agreement. Additional protection generally applies while a timely administrative appeal is pending.
These restrictions are subject to statutory exceptions, including certain jeopardy situations.
Therefore, missing an installment agreement payment does not automatically authorize an immediate bank levy.
Nevertheless, once the applicable restrictions have expired and the IRS has satisfied other legal requirements, enforced collection may become available again.
For a more detailed discussion, read Can the IRS Levy You While You Have an Installment Agreement?
If the IRS has already frozen your account, learn more about my IRS Bank Levy Help representation.
Can the IRS Garnish Your Wages After Terminating a Payment Plan?
Yes, when legally authorized, termination of an installment agreement can eventually expose a taxpayer to wage levy enforcement.
An IRS wage levy can require an employer to remit the nonexempt portion of an employee’s wages toward outstanding federal tax liabilities.
Unlike an ordinary bank levy, a wage levy generally continues against covered wages until it is released or another applicable termination event occurs.
For taxpayers who depend on employment income to pay mortgages, rent, utilities, and essential living expenses, a wage levy can create substantial financial hardship.
However, a previously issued wage levy and a new levy issued after termination raise different legal questions. The effect of an installment agreement on an existing levy depends on the terms of the arrangement and other relevant circumstances.
For information about representation involving active wage levies, visit my IRS Wage Garnishment Help page.
Can the IRS Reinstate a Defaulted Installment Agreement?
In some circumstances, yes.
The IRS may reinstate a defaulted or terminated installment agreement when applicable requirements are satisfied.
However, reinstatement is not automatic in every case.
The IRS may consider:
- The reason the original agreement defaulted.
- Whether the default issue has been resolved.
- The taxpayer’s history of compliance with prior payment agreements.
- Whether additional federal tax liabilities have arisen.
- Whether required federal returns and current tax obligations are being addressed.
- The taxpayer’s present financial circumstances.
- Whether the previously agreed monthly payment remains appropriate.
Some circumstances may permit reinstatement without an extensive new financial analysis. Other cases require a more complete evaluation of the taxpayer’s ability to pay.
A reinstatement fee may also apply.
For taxpayers whose finances have materially deteriorated, reinstating the same unaffordable payment arrangement may not provide a durable solution.
What If You Default Because You Cannot Afford the IRS Payments?
Not every installment agreement default results from carelessness or unwillingness to pay.
A taxpayer may initially have sufficient income to maintain an agreement but subsequently experience financial changes that make the required payments unrealistic.
Examples include:
- Job loss or reduced employment income.
- Declining self-employment or business revenue.
- Increased necessary household expenses.
- Unexpected medical or family expenses.
- Other material changes affecting the ability to pay.
When financial circumstances change, continuing under the original payment terms may become difficult or impossible.
Depending on the circumstances, the IRS may consider modification of an installment agreement or another collection alternative.
Potential options may include a lower monthly payment, a Partial Payment Installment Agreement, or Currently Not Collectible status when the applicable requirements are satisfied.
An Offer in Compromise may also warrant consideration in qualifying situations.
However, none of these alternatives is automatic. The IRS may examine income, allowable expenses, available assets, outstanding liabilities, and the remaining collection period before determining which arrangement is appropriate.
For a detailed discussion of this issue, read What Happens If You Can’t Afford the IRS Monthly Payment?
Can You Appeal the Termination of an IRS Installment Agreement?
In qualifying circumstances, yes.
Taxpayers may have administrative appeal rights concerning a proposed or actual installment agreement termination.
The IRS Collection Appeals Program (CAP) provides a mechanism for reviewing certain collection decisions, including proposed terminations and terminations of installment agreements.
Applicable deadlines are important. In general, the IRS provides an opportunity to appeal a proposed termination and an additional appeal period following actual termination.
A timely administrative appeal may also extend the statutory restriction against levies for the covered liabilities while the appeal is being considered.
However, the availability and scope of an appeal depend on the taxpayer’s circumstances and procedural history.
Appeal rights should not be confused with an automatic entitlement to retain the original installment agreement on unchanged terms.
Does Defaulting on an Installment Agreement Affect the IRS Collection Statute?
Potentially.
The IRS generally has ten years from assessment to collect a federal tax liability, subject to applicable statutory suspensions and extensions.
Certain events involving installment agreement requests, proposed terminations, and appeals can suspend the running of the IRS collection period.
For example, the statutory collection period is generally suspended for 30 days following a proposed termination of an installment agreement. A timely appeal may produce an additional suspension while the appeal is pending.
This can be significant for taxpayers with older federal tax assessments approaching their collection statute expiration dates.
Consequently, an installment agreement default may require analysis of both collection enforcement and the time remaining for the IRS to collect the debt.
The precise calculation depends on the taxpayer’s account history and applicable legal rules.
How GMD Tax Law Helps With Defaulted IRS Installment Agreements
A defaulted installment agreement can present several interconnected problems: an outstanding tax balance, potential collection enforcement, compliance issues, and payment terms that may no longer fit the taxpayer’s financial circumstances.
At GMD Tax Law, I represent Massachusetts individuals and business owners dealing with IRS collection problems, including existing installment agreements that have defaulted or are at risk of termination.
Depending on the circumstances, my representation may include:
- Reviewing IRS account transcripts, tax assessments, and outstanding balances.
- Evaluating the terms and status of an existing installment agreement.
- Examining CP523 notices and other correspondence concerning proposed termination.
- Identifying the reason for an installment agreement default.
- Evaluating applicable levy restrictions and potential collection exposure.
- Analyzing the taxpayer’s financial circumstances and ability to pay.
- Communicating directly with IRS collection personnel or Revenue Officers.
- Evaluating reinstatement, modification, or other available collection alternatives.
- Reviewing applicable administrative appeal rights and deadlines.
- Addressing related compliance problems within the scope of representation.
Clients work directly with me rather than a sales representative or non-attorney case manager.
Learn more about my IRS Installment Agreement Attorney services and broader IRS Tax Relief representation.
Frequently Asked Questions About IRS Installment Agreement Defaults
Will one missed IRS payment automatically terminate my installment agreement?
Not necessarily. A missed required payment may provide grounds for default, but ordinary termination procedures generally require notice and an opportunity to address the default before termination becomes effective.
What happens if I receive IRS Notice CP523?
CP523 generally means the IRS is proposing to terminate your installment agreement. The notice identifies the default and provides information about applicable deadlines, possible collection action, and appeal rights.
Can the IRS seize my bank account immediately after I miss a payment?
Generally, a missed payment alone does not eliminate the statutory restrictions governing levies. The status of the installment agreement, applicable notice and termination requirements, covered liabilities, and statutory exceptions all matter.
Can an IRS payment plan default because of new tax debt?
Yes. A newly incurred unpaid federal tax liability may jeopardize an existing installment agreement even when the taxpayer has made all scheduled payments toward older liabilities.
Will the IRS let me restart my installment agreement?
Reinstatement may be available, but eligibility depends on the circumstances. The IRS may consider the reason for default, current compliance, payment history, and whether a new financial evaluation is required.
Does an IRS installment agreement default eliminate the tax debt?
No. Default or termination of a payment arrangement does not eliminate the underlying tax liability. Applicable interest and penalties may continue to accrue, and collection enforcement may resume when legally authorized.
Facing an IRS Installment Agreement Default? Speak With a Massachusetts Tax Attorney
An IRS installment agreement default can create uncertainty about whether your payment arrangement remains in effect, whether the IRS intends to terminate it, and when collection enforcement may resume.
For individuals and business owners with substantial federal tax debt, those questions can have serious financial consequences.
At GMD Tax Law, I provide direct attorney representation involving IRS installment agreement defaults, threatened bank levies, wage garnishments, Revenue Officer collection matters, and other federal tax controversies.
If you have received an IRS default notice or are concerned that your payment agreement may be terminated, contact GMD Tax Law to discuss your situation.
Call 617-237-6347 or contact GMD Tax Law online to request a consultation.
