Missing a payment on an IRS installment agreement could put you into default and lead to termination of the payment plan. But before this happens, the IRS will usually send a Notice CP523 providing you with 30 days to catch up on the missed payment. 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 the IRS deems you to be in default of your installment agreement, the IRS may pursue collection actions, including levying your assets.
This guide walks you through what to expect if you miss a payment on your installment agreement. Contact Damiens Law to talk with an experienced lawyer about IRS payment plans today.
Key Takeaways:
- An IRS installment agreement allows taxpayers to pay off their taxes over time instead of all at once.
- The IRS can terminate an installment agreement if you default by missing payments, incurring a new tax debt, or not filing required tax returns.
- Before terminating an installment agreement, the IRS will typically send a warning notice (CP523).
- By responding promptly to CP523 notices, taxpayers can prevent termination and avoid IRS collection actions.
- Installment agreement reinstatement depends on a variety of factors, and it often helps to consult with an experienced tax professional in this situation.
What is an IRS installment agreement?
An installment agreement is a payment plan with the IRS. You agree to make monthly payments on your back taxes, and the IRS stops all collection actions against you as long as you stay compliant with the terms of your payment plan. However, if you default and the IRS terminates the agreement, the agency can pursue involuntary collections.
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, including 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.
Does an IRS Payment Plan Stop Automatically?
The IRS doesn’t usually stop a payment plan or installment agreement without warning. The agency generally sends out a notice, letting you know you’re in default and what to do to avoid termination. However, if they don’t receive the notice, taxpayers may believe the plan “stopped automatically” when payments unexpectedly fail to process or when the IRS issues a termination notice.
It should be noted that even though there’s no official grace period for a missed payment, the missing payment can often be addressed if the taxpayer responds within 30 days after receiving a termination notice.
What happens if I miss a payment on an IRS 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.
| Payment Plan Default Timeline | |||
|---|---|---|---|
| Stage | What’s Happening | What This Means for You | Why Timing Matters |
| Missed or Returned Payment | Monthly payment wasn’t successfully made | Installment agreement or payment plan is at risk of default | Early action to rectify unsuccessful payment can prevent default |
| Default warning issued | The IRS notifies you of its intent to terminate the agreement | This is the formal warning stage | You have a limited amount of time to respond (often 30 days) |
| Payment agreement terminated | The IRS ends the payment plan or installment agreement | The IRS may resume tax debt collection actions | More difficult to save the payment agreement |
| Reinstatement of payment agreement or request for alternative tax settlement option | IRS reassesses your financial situation to determine eligibility | Reinstatement with new payment terms or use of a different tax resolution option | IRS approval isn’t automatic or guaranteed |
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.
The IRS typically sends out IRS Notice CP523 to warn 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?
The first step for reinstating your IRS payment plan or installment agreement if you have received an IRS Notice, such as the CP523, is to cure the default. This will often entail making all missed payments. After this is done, you’ll need to reinstate your payment plan.
Depending on your financial situation and reasons for default, reinstating your IRS payment plan may involve one or more of 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 its 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. 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.
Lastly, the IRS may offer a restructured agreement based on its assessment of your financial situation, as well as require you to set up auto-pay for your monthly payments. Understand that even if you successfully reinstate your installment agreement, the IRS can still file a federal tax lien.
What to do if you are facing default
You have several options to prevent your account from going into default:
Pay off your back balance
Most defaults happen because taxpayers miss payments. You can minimize this possibility by catching up on missed payments before the termination date or payment deadline located in your notice letter.
Call the IRS for more options
If you are unable to make a payment or need more time to do so, contact the IRS and ask about other options, such as restructuring your installment agreement. To do this, the representative may ask for additional information about your finances or for documentation that shows reduced income or increased expenses that support your position.
File an appeal
If you disagree with the IRS’s decision to terminate your installment agreement, you can appeal it. You may be able to appeal through a Collection Due Process hearing or through the Collection Appeals Program (CAP).
Contact a tax lawyer to act as your representative
Consider hiring a tax attorney to help you through the process. A knowledgeable tax lawyer from Damiens Law can communicate with the IRS on your behalf, explain your options to you, and help you get back on track with the IRS.
FAQs About IRS Payment Plan Defaults
Can I skip an IRS installment payment?
No, as the IRS can legally terminate your agreement if you miss a single payment. However, in most cases involving a missed payment, the agency won’t terminate the payment agreement 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?
Not officially. Despite this, the IRS usually gives taxpayers 30 days after sending a termination notice 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. If your financial situation justifies it, the IRS may be willing to accept smaller monthly payments. If your financial situation is so dire that you can’t even afford smaller monthly payments, it may be time to consider an offer in compromise or currently not collectible status.
What is IRS Notice CP523?
This is the termination notice letter the IRS sends to taxpayers, warning them of the IRS’s intention to terminate an installment agreement.
Will the IRS reinstate my installment agreement after default?
It depends on why you defaulted and your current financial situation. Sometimes the IRS will automatically reinstate an installment agreement, but other times the IRS makes reinstatement decisions on a case-by-case basis.
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.
