What If I Can’t Pay My IRS Installment Agreement? What Happens If I Miss a Monthly Payment?

Setting up an installment agreement can be a huge relief, especially if you’ve had unpaid taxes hanging over your head for some time, but missing a payment can put you right back where you started -- not making monthly payments can put you into default, placing you at risk of levies, liens, and other serious consequences. If you have missed one or more installment agreement payments, it is crucial to know what happens next, what’s at stake, and how you can protect yourself from further collection actions by the IRS. 

Already, missed a payment? Worried that you won't be able to maintain your installment agreement? Then, it’s time to talk to a tax professional who can listen to your priorities, explain your options to you, and help you come up with a plan. Use our tax professional directory to find the right tax pro for your current needs—start your search for a local tax pro today.

Key takeaways

• Missing a monthly payment on your IRS installment agreement puts you into default.
• The IRS will send Notice CP523, alerting you about the default and possible termination. 
• If you make the payment within a month, the IRS will allow you to keep the payment plan.
• If you don't pay, the plan will terminate and the IRS can go after your assets.
• To avoid going into default, talk with a tax attorney about proactively making changes to your installment agreement or applying for another relief option.
• You have appeal rights if the IRS terminates your installment agreement.

What Happens When You Miss a Payment?

If you fail to make a payment, you are technically no longer meeting the terms of your installment agreement. The IRS will then notify you that you are behind and give you 30 days to get caught up. If you don't make the monthly payment, the IRS will terminate the agreement and pursue involuntary collections. Typically, at this point, you owe last month's and the current month's payment, so you'll end up paying more than a month's worth of payments to get back into good standing. If you make your full payment and then stay on track, you’re unlikely to face additional consequences. Remember that the main goal of the IRS is to collect the taxes you owe, not needlessly punish taxpayers. 

One Missed Payment vs. Consistent Missed Payments

One missed payment is easy to get past. But if you begin skipping payments regularly or consistently paying late, the IRS will take notice and take further action. They are likely to terminate your agreement and move forward with a levy or lien. 

Letters to Watch for From the IRS

If you have missed a payment, watch out for a CP523 notice or IRS Letter 2975. Both notices state that you missed a payment and indicate that the IRS intends to terminate your installment agreement and move forward with levying your assets. It also indicates how much you owe. At that point, you have 30 days to pay what you owe and halt IRS levies. If you don’t make your payments or otherwise come to a new agreement with the IRS, the IRS can begin levying your assets 90 days after sending these notices. 

What if I miss a payment on an installment agreement for payroll taxes?

If you are on a payment plan for payroll taxes and you miss a payment, the IRS will automatically reinstate your payment plan once you make up the missing payment if you owe less than $10,000 and can continue to make monthly payments that pay off the debt by the original end date of your payment agreement. If you don't meet these terms, you may need to apply for a new payment plan and possibly file a financial disclosure. Otherwise, if you don't get back into compliance, the IRS can demand payment in full and pursue your assets as necessary.

How to Avoid Defaulting on Your Installment Agreement

You want to avoid defaulting on your installment agreement at all costs. When you don’t respond to the notices sent by the IRS, they can move forward with more serious collection actions. They may seize your assets, garnish your wages, or garnish money held in your bank accounts. If you owe a significant amount of money, they can even restrict your passport.

Steps to Avoid Default

If you are unable to make a payment, know that this doesn’t necessarily mean the end of your installment agreement. The IRS prefers to keep people on an installment agreement whenever possible, as this ensures that they get paid. Pay what you owe as quickly as possible, and then make it a priority not to fall behind again.

What if you cannot pay what you owe or are unable to keep up with your installment agreement? Unfortunately, this is fairly common. It’s easy to set up an installment agreement online without ever even talking to someone, which can land you in a situation where you’re contracted to make payments you cannot afford. In this case, it is crucial to pivot to a new plan and work with the IRS.

When to Contact the IRS

The moment you realize you cannot keep up with your installment agreement is the moment you should call the IRS to come up with different arrangements. They want to collect what they are owed in the least painful and expensive way possible, and that means avoiding levies and liens. If there’s an alternative way to secure full or partial payment from you, they may be open to it.

This is where many people go wrong. Instead of contacting the IRS, they hope that their circumstances will change enough to allow them to catch up on their payment plan. They dodge notices from the IRS and wait for a windfall or raise to get them back on track. The longer you wait to notify the IRS about your situation, the less flexibility they have when it comes to fixing your problem.

You can also reach out to a tax professional for help. They'll talk with you about your tax debt, your finances, and your anticipated future tax situation. Then, they'll help you come up with a plan to deal with your unpaid taxes. 

Alternatives to Default

There are numerous options that may be available to you in lieu of default. When you contact the IRS, they may already have options you can consider. A lower monthly payment or longer repayment period could give you enough breathing room to get caught up. If not, consider these relief options:

• Partial Payment Installment Agreement - With this option, you pay what the IRS determines you are able to pay until the statute of limitations passes on your tax debt. At the end of this timeframe—usually ten years from the date that the taxes were initially due—the remaining taxes are no longer collectible, and you don't have to pay the remaining balance. Note that this program requires a long application and a financial disclosure.
• Currently Not Collectible status - Those who are in Currently Not Collectible status do not have the funds to make any payments toward their taxes while still paying their basic living expenses. This option does not stop interest and penalties from accruing but pauses collection efforts. The IRS can remove this status from your account if your financial situation improves. 
• Offer in Compromise - This program allows you to settle your tax debt for less than you owe. This ties back to what we talked about earlier—the IRS wants to collect what they are owed, either in full or in part. If the IRS genuinely has no chance of getting payment in full from you, they may accept an Offer in Compromise. However, you can’t just make a random offer and hope they will accept it. Your offer has to be realistic based on your assets and income.

How to Address a Defaulted Payment Plan

You have defaulted on your installment agreement. What happens now? You have options, but time is of the essence if you want to avoid termination and collection actions. Here are the main options.

Revising Your Current Installment Agreement

It’s time to contact the IRS, and if you’re too nervous or overwhelmed to call them on your own, reach out to a tax professional who can advocate for you. You may be able to reinstate your installment agreement if you can make the same payments going forward that you originally agreed to. If your payments aren’t sustainable on your current income, the IRS may be willing to renegotiate your current payments into something more practical, but in this case, you generally must meet the terms of your original agreement. 

Changing the Amount of Your Monthly Payment

The IRS gives taxpayers who owe up to $50,000 until the collection statute expiration date (CSED) to pay, and as long as your new monthly payment meets those terms, you should be able to get approved fairly easily and set it all up online. To calculate your monthly payment, divide your total amount due by the number of months until the CSED (about 10 years after the taxes were originally assessed), and then, round up a bit to account for interest and penalties. To be on the safe side, you may want to choose the lowest payment possible. Then, you can pay extra if you like, but you only have to pay a small amount to stay in compliance.

Shifting Your Payment Date

Perhaps something as simple as changing your due date can help you keep up with your monthly payments. When you pay by direct debit, the IRS lets you choose any day between the 1st and the 28th. Picking a date that works with your budget can be a big help.

Negotiating a New Installment Agreement Arrangement  

In some cases, you may need to negotiate a whole new agreement. For example, if you're on a guaranteed installment agreement that goes over three years, you may need to shift to a simple payment plan that lasts up to 10 years (or until the CSED if sooner). That change may be possible without a lot of paperwork. However, you have to switch from a simple payment plan to a non-streamlined agreement (for example, because your balance got over $50,000 for some reason), then you may need to file a collection information statement. In all cases, if you want to negotiate a new arrangement, be prepared to show the IRS documentation of your current financial situation; they may want proof that you truly cannot afford payments.

Will the IRS Reinstate My Installment Agreement?

It truly all depends on the details of your agreement and your personal situation. Generally, if you make a good-faith effort to address the reason for default, the IRS will let you reinstate your installment agreement. If you have a consistent history of issues and you don't try to correct them, the IRS probably won't reinstate your installment agreement.

Consider this example: you file your taxes for the year after starting your installment agreement. You forget to send your payment in time for the current tax year. This makes you delinquent on your current taxes which triggers a default on your installment agreement. You immediately pay the balance due to clear your liability and reinstate your installment agreement.

Another example: you have fallen behind due to a significant unexpected bill or loss of work. However, you are now back on track financially and expect to be able to make payments moving forward. The IRS reinstates your installment agreement and adds your missing payments to the end of your installment agreement, extending it by a few months.

Consequences of Defaulting on Your Payment Plan

When you stop making payments and default on your payment plan, the IRS is free to move forward with whichever collection actions it chooses. You could have your assets seized to pay for your back taxes, get your wages garnished, or have money from your bank account seized.

My Check Didn’t Clear—Now What?

If the IRS attempts to cash your check or make an electronic withdrawal and there is not enough money in your account, your payment will “bounce.” At this point, the IRS will not attempt to resubmit the payment and they will send you Letter 608C, Dishonored Check Penalty Explained. 

This is where it gets confusing—the clearinghouse that handles the payments may attempt to resubmit the payment, even if the IRS does not. If the payment clears the second time, the liability is cleared and there’s nothing more to do on your end. But you won’t know this when you receive Letter 608C. That’s why it’s important to contact the IRS if you receive this notice but the payment has been removed from your bank account; it’s possible that Letter 608C was sent prior the clearinghouse retrying the payment.

Note that there is a financial penalty for a dishonored check. The IRS issues a penalty of 2% of the check amount. If the check is $1,250 or less, the penalty is $25. You may request penalty abatement for this fee if you choose.

How to Appeal a Terminated Installment Agreement

You have appeal rights if the IRS terminates your installment agreement. You can appeal within 30 days of receiving a notice about the default. At this point, you should go through the Collection Appeals Program, which typically requires you to ask to speak with a manager and file Form 9423. Otherwise, you can appeal when the IRS terminates your agreement, and again, you should use CAP appeals. If the IRS terminates the agreement and sends you a Final Intent to Levy notice, you can appeal with a Collection Due Process (CDP) hearing at that point. 

When You Should Contact a Tax Professional

In general, it’s never too early to contact a tax professional. But if you wait too long to talk to a tax professional, the penalties and consequences could pile up. Consider contacting a tax expert if you:

• Are struggling on a regular basis to make payments: If you are nearly falling short every single month when your installment agreement is due, your payment plan may not be sustainable long-term. Talking to a tax pro before you fall behind is a good way to take control of what happens next.
• Have already missed multiple payments: If you have missed multiple payments, you are at immediate risk of levies or liens. You need a tax professional to help you protect your assets and get back on track with an installment agreement.
• Have received notices from the IRS: The IRS is required to send notices before proceeding with a levy or lien. Use this time to consult a tax expert and decide on a plan.
• Are no longer able to fulfill the terms of your installment agreement: Circumstances change, and if you cannot make your monthly payments, you may have other options available. A tax professional can advocate for you with the IRS.
• Have additional taxes due from another tax year and don’t know how to handle them: As you know, your installment agreement requires you to file subsequent tax returns on time and pay all taxes by their due date. If you know that you cannot afford to pay your taxes in full while paying your installment agreement, a tax professional should be your next call. In some cases, the IRS will let you roll the new balance into your existing payment plan, but you cannot set up multiple payment plans.

We understand that dealing with the IRS is stressful, and spending hours on hold only makes the experience even more overwhelming. A tax professional can sort through your documentation, figure out what you can and cannot pay, and communicate with the IRS on your behalf. Start your search for the ideal tax pro for your case with the listings at TaxCure.