How to Avoid the Consequences of an IRS Payment Plan Default

late installment agreement payments

Help! I Defaulted On My Installment Agreement!

The Service and the taxpayer base installment agreements on the taxpayer’s current financial status and a lot of speculation. Sometimes, financial abilities change and/or the guesses about future events are just plain wrong. As a result, the dreaded CP523 notice is rather commonplace.   Here is what to do if you defaulted on your installment agreement.

It’s important to note that this letter is a notice of possible default and not a notice of IRS payment plan default. There’s a big difference. Taxpayers usually have 30 days to cure default and reinstate their agreements. Many times, that process is almost as simple as an exchange of correspondence.

How Can the IRS Terminate an Agreement?

Each installment agreement comes with a list of no-nos. The two biggest ones are monthly on-time payments and compliance with future tax liability. That means on-time filing and on-time payment in full.

If the taxpayer misses a payment, an obvious way to cure the IRS payment plan default is to remit the funds. Typically, the IRS does not keep a record of wrongs, at least in this context. A taxpayer could technically miss two or three installments, or even more, and still have the same opportunity to reinstate the monthly payment plan. Unlike home mortgages and some other payment contracts, installment agreements do not come with acceleration clauses.

However, simply writing a check is not always an option. Or, it may be unsustainable over the long term. There are solutions in these cases as well, and these answers are explored below.

Unpaid future tax liabilities also trigger many IRS payment plan defaults. It’s very important to keep up with income withholding or estimated tax payments. It’s one thing to send in a few hundred dollars to make up for a delinquent installment plan payment. But, it’s quite another to send in a few thousand dollars for a year’s worth of tax liability.

What Can You Do to Avoid IRS Payment Plan Default?

If the monthly installment payment is no longer affordable, it is possible to renegotiate the terms. Many times, taxpayers promise to pay the most they can possibly afford, and the slightest financial reverse means default. Renegotiations of this type are not always successful, but they are usually worth a try.

In rare cases, the IRS may allow the taxpayer to forego a couple of payments and tack them onto the end of the installment agreement.

The Internal Revenue Manual allows taxpayers to roll new amounts into their existing agreements. There’s a very big catch. The additional amount cannot extend the agreement more than two months, in most cases. However, if the entire debt is less than $50,000, the IRS usually approves conversion to a Direct Debit Installment Agreement. These pacts usually give the taxpayer seventy-two months to pay.

If the government threatens to revoke your installment agreement, do not bury your head in the sand. Instead, take action to avoid IRS payment plan default.  And the best way to take action is to contact a good tax attorney who knows how to handle such precarious situations.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.