If you missed an IRS installment payment, the IRS will send you Notice CP523. This means your installment agreement could be terminated if you don’t act quickly. The IRS can also terminate your payment plan if you don’t file a tax return, incur new tax debt, or fail to meet other criteria related to your plan. If that happens, the IRS may pursue collection actions including levying your assets.
Owing taxes is a distressing experience. Not only is this a debt, but it is a priority debt that even bankruptcy cannot always remove. Many taxpayers enter into installment agreements with the Internal Revenue Service (IRS) to pay off their taxes, but they may have an emergency or other unforeseen circumstance arise that jeopardizes their ability to pay off the payment plan with the IRS.
This guide walks you through what to expect if you default on your payment plan. Consider contacting an experienced and dedicated tax lawyer from Damiens Law for assistance. Contact our office at (601) 957-9672.
Key Takeaways:
- An IRS installment agreement allows you to pay off your tax balance over a set period of time instead of all at once.
- The IRS may terminate your agreement if you fail to pay your monthly payment on time.
- The IRS can also terminate your agreement for other reasons such as incurring new tax debt or not filing your tax returns.
- If you miss an installment agreement payment, either pay right away after receiving Notice CP523 or contact the IRS to let them know of your financial hardship.
- File an appeal if you don’t agree with the information on your notice.
- Work with an experienced tax professional when you have an IRS payment plan missed payment.
What is an IRS installment agreement?
An installment agreement is a payment plan with the IRS. You agree to make monthly payments within an agreed period of time for back taxes you owe. You can usually request a specific amount to pay each month, as long as you pay off the debt within the collectible period. Keep in mind that interest continues to accrue and the IRS also adds a small monthly penalty while you make payments under a payment plan. So, the sooner you can pay it off, the better.
One important reason taxpayers enter into an IRS installment agreement is because it allows them to stay in compliance with the IRS, which prevents additional collection activity against them. Payment plans keep you in good standing and allow you to avoid liens and levies, not to mention the large penalties that come with nonpayment. If you default on a payment plan, you may face liens, levies, and other collection actions.
Why would the IRS terminate an installment agreement?
The IRS can propose terminating an installment agreement when the taxpayer is in default. The IRS defines default as any of the following:
- Failing to pay payments when due under the agreement’s terms
- Providing inaccurate or incomplete financial information
- Not meeting the required terms of the agreement
Common actions that may constitute default include:
- Missing at least two payments in a single year
- Failing to pay another tax liability when it is due
- Failing to make estimated tax payments
- Providing inaccurate financial information when entering into the installment agreement
- Failing to provide an updated financial statement after the IRS requests it
- Failing to pay a modified payment amount once the IRS has reviewed new financial information and required a different payment amount
- Failing to pay penalties that accrue
In some cases, default is automatic, while in others, it is discretionary.
What happens if I miss a payment on an IRS installment agreement?
If you miss a monthly payment on an IRS payment plan, the IRS may move to terminate your installment agreement. The IRS will notify you of its intent to place you in default and terminate your installment agreement via Notice CP523. Potential consequences of defaulting on an installment agreement include:
- Additional penalties and interest on your tax debt
- Renewed collection actions
- Stopped passport renewals with the State Department
- Filing of a notice of federal tax lien
- Levy of your wages or bank accounts
Working with a knowledgeable tax lawyer can help you understand your legal rights and options if you miss an IRS installment payment.
Grace period for IRS installment payments
Although there is no technical grace period, the IRS gives most taxpayers at least 30 days to rectify a missed installment payment.
That being said, the IRS will typically send out IRS Notice CP523 to give you notice of your default on the installment agreement before terminating the agreement. So, you do have a chance to pay or respond before you default.
This notice warns you that the IRS may levy your assets if the default is not cured. The notice states that you have 30 days to catch up on missed payments or contact the IRS about another solution.
How do I reinstate my IRS payment plan?
If you have received an IRS Notice such as the CP523 and have cured the default, you will need to get your payment plan reinstated. Reinstating your IRS payment plan may involve the following:
- Providing additional financial details to the IRS
- Explaining the reason for your default and how you can avoid similar situations in the future
- Filling out a new installment agreement application
- Providing additional information about your assets and income
- Setting up direct debit payments or automatic payroll deductions to ensure the IRS receives their payments on time
- Getting approval from a manager
If this is the first time you defaulted in 12 months, the process may be more straightforward, and you can contact the IRS directly and request reinstatement of the IRS payment plan. You may need to pay a reinstatement fee if the IRS agrees to reinstate your agreement.
There are some instances when the reinstatement of an installment agreement is automatic. For example, the IRS can reinstate an installment agreement if you defaulted on the agreement due to incurring additional tax liabilities and are able to pay off the new tax liability promptly.
If the reason for your termination is the accumulation of additional tax debt, you might be required to pay off the new balance before you can reinstate the installment agreement. In some situations, you may be able to roll the new tax debt into your existing payment plan.
The IRS may offer a restructured agreement based on its assessment of your ability to pay. Even if you reinstate your installment agreement, the IRS can still file a federal tax lien.
What to do if you are facing default
It is usually better to prevent default from occurring in the first place than trying to fix the problem after the fact. You have several options to prevent your account from going into default:
Pay off your back balance
Most defaults happen because taxpayers miss payments. If this is what may be jeopardizing your installment agreement, you may be able to minimize the possibility of default by catching up on missed payments. The notice letter you receive will include a termination date or payment deadline. Be sure to make your payment before this date.
Call the IRS for more options
If you are unable to make a payment or need more time, you can contact the IRS directly and ask about your options. If you are able to catch up on payments or reduce the amount of your payments, you may be able to restructure your installment agreement and avoid default. The representative may need to ask for additional information about your finances or for documentation that shows reduced income or increased expenses that support your position.
If you do nothing in response to the IRS notice, officers can move to terminate the installment agreement. However, by explaining your situation to the IRS, you can allow the agency to help with your situation instead of having to take expensive collection activity.
File an appeal
If you disagree with the IRS’s decision to terminate your installment agreement, you can appeal this decision. However, you must file your appeal within 30 days of the date of termination of the installment agreement. You will submit Form 9423, a collection appeal request, to formally disagree with the decision. A tax reviewer reviews the appeal and makes a determination on the appeal. The IRS does not take any enforcement action while you’re waiting for a decision from the Office of Appeals.
You may also have to have a managerial conference between a revenue officer and a settlement officer from the Office of Appeals. The officers determine whether to proceed with the appeals process. Managerial conferences typically occur when the IRS may take collection activity such as tax liens, asset seizures, and bank levies.
If you fail to respond to the IRS Notice CP523, the IRS can change the status of your account and pursue collection activities.
Contact a tax lawyer to act as your representative
If you do not feel equipped to deal with the IRS yourself, you can appoint a qualified representative to represent you in front of the agency. A knowledgeable tax lawyer from Damiens Law can communicate with the IRS on your behalf, explain your options to you, and show that you are serious about resolving the issue.
To make the appointment official, you will need to properly prepare a Form 2848 and Declaration of Representative form. These forms are available on the IRS website, or you can request them at your local IRS office.
FAQs About IRS payment plan defaults
Can I skip an IRS installment payment?
The terms of the agreement do not allow you to skip a monthly payment. The IRS can legally terminate your agreement if you miss a single payment, but in most cases, the agency won’t take this step until you miss two payments. If you cannot afford a monthly payment, reach out to the IRS before you miss the payment to explain the situation.
Is there a grace period for IRS installment payments?
There is no grace period for late payments if you have an installment plan. However, the IRS usually gives taxpayers 30 days to rectify the situation before putting the installment agreement into default. Note that you get to pick the due date for your payments, so you may want to move the payment to a more convenient date.
What if I can’t pay the IRS installment agreement?
If you can no longer afford the monthly payments you agreed to, contact the IRS or work with a tax attorney to modify your agreement. You may be able to lower the amount you pay every month. If you can no longer afford monthly payments, it may be time to consider an offer in compromise or currently not collectible status.
Contact a knowledgeable tax lawyer for help
What happens if you default on an IRS installment agreement depends on your circumstances and whether you can quickly remedy the situation. If you are afraid that you may soon be in default of your installment agreement or if the IRS has already contacted you about a defaulted plan, consider reaching out to Damiens Law to set up a consultation with our legal experts.
Contact us now to get started.
