The agreement was working. Payments were going out, the balance was coming down, and the whole thing had stopped being the first thing you thought about in the morning.
Then a notice arrives saying the IRS intends to terminate it, and the relief you had bought yourself evaporates in a paragraph.
What Happens When an IRS Payment Plan Defaults
The IRS sends a CP523 notice stating it intends to terminate the agreement and levy your assets. You have 30 days from the date of the notice to respond. Do nothing and the agreement ends, collection restarts, and a lien or a levy follows. Most defaults can be reinstated inside the window.
What Actually Caused It
Four causes account for nearly all of them, and only one is the one people assume.
A new balance for a later year
This is the most common cause by a distance, and it is why we are publishing this in September. You file an extended return in October, it carries a balance, and that new liability breaches the terms of an agreement covering earlier years. The agreement did not fail because you missed a payment. It failed because you filed.
If you extended in April and you already know the October return will show a balance, this is the month to deal with it, not the month after.
A missed or late payment
The obvious one. A changed bank account, a direct debit that bounced, a month where something else took priority.
An unfiled return
Filing compliance is a condition of every agreement. A return that was due and never went in can default the plan on its own even if every payment was made on time.
A change of address the IRS never got
The notices went somewhere else. The thirty days ran. This is a paperwork failure with the same consequences as a payment failure, and no other failure so often produces a levy that feels like it came without warning.
The CP523 Notice and the Thirty Days It Gives You
The notice is the whole opportunity. The IRS states that a CP523 informs you of the intent to terminate your installment agreement and seize your assets, and that you should contact them no later than 30 days from the date of the notice.
It also tells you what happens if you do not respond. The agreement is terminated and collection action begins, which can include a federal tax lien or a levy on wages and bank accounts.
Two things about that window. It runs from the date of the notice, not from the day you opened it. And paying the missed amount before the termination date can prevent termination outright, which is a cheaper outcome than reinstating afterwards.
How to Reinstate
The request and the fee
Reinstatement after default is one of the changes that can be made through your IRS Online Account, alongside changing the payment amount, the due date, and the bank details. The IRS publishes what it costs to revise an existing payment plan, which is $6 online or $89 by phone, mail or in person. For taxpayers meeting the low income criteria it is $6 online and $43 by phone, mail or in person, either of which may be reimbursed if certain conditions are met. Changes made to an existing direct debit agreement carry no fee at all.
Those figures are worth reading against the alternative. The difference between doing this online and doing it by phone is most of ninety dollars, and the difference between doing it and not doing it is a lien.
What the IRS will want changed
If the default was a new balance, the new year has to come into the agreement, which usually means a higher monthly payment. If the default was affordability, expect to substantiate the figures. Where the required minimum payment is not something you can meet, the IRS directs taxpayers to Form 433-H, which is the financial statement that supports a lower amount.
When reinstatement is refused
It happens, usually where there is a history of repeated defaults or where required returns are still outstanding. At that point the options are the ones that would have applied without an agreement, and the CP523 itself sets out your right to file an appeal and request a hearing with the IRS Independent Office of Appeals.
What Disqualifies You From a Plan Altogether
Unfiled returns, first and always. The IRS will not enter an agreement while required returns are missing, and it will not reinstate one either.
Beyond that, the online application route has its own thresholds. For an individual long-term agreement, the IRS states you may qualify to apply online if you owe $50,000 or less in combined tax, penalties and interest and have filed all required returns. Above that, or where the numbers need explaining, it becomes a documented conversation rather than a form.
For where the streamlined tiers sit and how the terms differ between them, our page on IRS installment plans sets out the two tiers, assessed liability under $25,000 and assessed liability from $25,001 to $50,000, along with what happens above them. August’s guide to who is eligible and how to apply covers the application itself.
If You Cannot Afford the Plan You Had
Renegotiating the amount
An agreement you cannot afford is an agreement that will default again, and a second default is harder to recover from than the first. Renegotiating before you miss is always available and almost never done.
When currently not collectible is the accurate description
If your income genuinely will not cover necessary living expenses and a payment, currently not collectible status is the accurate description of your situation, and requesting it is more honest than promising an amount you cannot pay. Collection is suspended while it applies. The balance stays and interest accrues on it, and the status is reviewed as circumstances change.
We wrote about that whole scenario in what happens when you owe the IRS but cannot afford to pay anything.
If Collection Has Already Restarted
If the thirty days went by and a levy has landed, the agreement is no longer the question. Getting the levy released is, and that runs through resolving the account rather than through the reinstatement form. This month’s post on stopping a wage garnishment covers the routes.
And whatever else is happening, interest and penalties have been accruing throughout. Our guide to delinquent tax penalties and interest explains how the two stack, which is usually why the balance looks larger than the payments suggest it should.
The Thing Worth Doing Today
Find the CP523 and read the date on it. Everything available to you is decided by how many of the thirty days are left.
Then work out which of the four causes it was, because the fix is different for each. A missed payment is a payment. A new balance is a renegotiation. An unfiled return is a filing. A missed notice is an address change and a phone call.
We are CPAs in Uniondale and a defaulted plan is one of the most common things people call us about, usually apologetically. There is nothing to apologize for. Plans default because life is uneven, and the system has a route back that most people never find on their own.
Guy’s background is here, and if there is a notice on your table with a date on it, that is the thing to send us.
FAQ
What happens if you don’t pay an IRS installment agreement?
The IRS issues a CP523 notice stating that it intends to terminate the agreement and seize your assets, and gives you 30 days to respond. If you do not, the agreement is terminated and collection resumes, which can include filing a federal tax lien and levying your wages or bank accounts. Paying the missed amount before the termination date can prevent the termination rather than requiring a reinstatement afterwards.
What happens when a payment plan defaults?
The protection it gave you ends. While an agreement is in force the IRS holds off enforced collection; once terminated, the account returns to the collection queue with a lien and a levy both on the table. Interest and penalties have been accruing throughout and continue to. The balance does not reset, but the terms you had agreed do.
How to reinstate a defaulted IRS payment plan?
Contact the IRS inside the 30 days on the CP523. Reinstatement can be requested through your IRS Online Account, where you can also change the payment amount, the due date and the bank details. The IRS charges $6 to revise a plan online or $89 by phone, mail or in person, with reduced and potentially reimbursable fees for taxpayers meeting the low income criteria and no fee for changes to an existing direct debit agreement. Expect to bring the account back into filing compliance and, if a new year caused the default, to fold it into the agreement.
What disqualifies you from an IRS payment plan?
Unfiled returns are the main one, and they block reinstatement as well as a new agreement. A history of repeated defaults will weigh against you. And the online application route carries its own threshold, since the IRS states that individuals may qualify to apply online for a long-term agreement if they owe $50,000 or less in combined tax, penalties and interest and have filed all required returns. Above that the agreement is still available, but it is negotiated with documentation rather than granted through a form.