IRS Notice CP 523: Default on Installment Agreement

irs installment agreement default

Notice CP523 means that your IRS payment plan is in default. You have 30 days to make up missing payments or 76 days to appeal the notice. If you don't take action, the IRS will terminate your installment agreement, and then, the agency will start involuntary collections, including tax liens, wage garnishments, bank levies, and asset seizure.

If you live in the United States, the IRS sends this notice through certified mail, and if you live out of the country, it comes via registered mail. Here is an example of CP-523 from the IRS.

Key takeaways

CP523 - You have defaulted on your payment plan.
When it comes - When you miss a monthly payment or break other terms of your IRS installment agreement.
What to expect - If you don't respond, the IRS will terminate your payment agreement, issue a tax lien, and move forward with wage garnishment or other involuntary collection methods.
How to respond - Make the monthly payment to avoid termination, or address other issues presented in the notice.
What if you disagree - Appeal through the Collection Appeals Program.

When Does the IRS Send Notice CP523?

The IRS sends this notice to taxpayers who have defaulted on their installment agreements due to:

Missing a monthly payment - for instance, their bank rejected the automatic debit or they didn't make a payment manually.
Refusing to provide the IRS with updated financial information - as part of your payment plan, you agree to provide the IRS with collection information statements if requested.
Providing inaccurate financial information when applying for the installment agreement - if the IRS discovers that you lied on your application, they will put your agreement into default.
Incurring a new tax balance - The terms of your installment agreement say that not paying taxes puts you into default, but in some cases, the IRS may allow you to roll a new tax debt into your existing installment agreement.
Not filing a tax return - You also must file tax returns or risk going into default. However, if applicable, you can explain to the IRS why you weren't required to file.
Not paying quarterly estimated taxes - Your payment plan can also go into default if you're supposed to pay quarterly.

If you're on a business payment plan, you may go into default for all of the reasons listed above, and additionally, your plan will default if you miss a deposit for payroll taxes.

What Should You Do If You Receive Notice CP 523?

In most cases, if you receive Notice CP523, make a payment by the due date on the letter to keep your payment plan active or take another action depending on why you received the letter. Here are the main options:

If you missed a payment - Make the monthly payment by the deadline. Contact the IRS to make sure the payment was received. If possible, set up direct debit to avoid missing future payments.
If you incurred a new tax balance - Call the IRS or contact a tax professional to see if they can restructure the new balance into a new monthly payment plan. You may have to fill out a collection information statement to get the payment plan approved.
If you didn't update your financial information - This happens more often with a partial payment installment agreement than a standard payment plan, but in either case, contact the IRS and provide them with the requested information.
If the IRS believes you lied on your application - Consider reaching out to a tax professional for help. They can help you substantiate your original application if it was filled out accurately. If not, they can help you understand your options and whether or not you need to worry about tax fraud allegations.
If you disagree with the notice - If you disagree with the default notice and don't want to take one of the above actions, you can appeal the termination through the Collection Appeals Program, but you may need to wait until the IRS actually terminates the agreement.

Pay attention to the deadline. If you miss the deadlines, the IRS will terminate your installment agreement. Although you can reapply, the terms are much harder after default, and as soon as the IRS terminates the agreement, they can issue tax liens and start involuntary collections. You have 30 days to make up missing payments and 76 days to appeal.

How to Appeal the Termination of Installment Agreement

If you don't respond to the notice, the IRS will terminate your installment agreement on the 46th day. Then, at that point, you have 30 days to appeal the termination through the Collection Appeals Program. That's why people say you have 76 days to appeal. Here's an overview of the process:

If you're working with a Revenue Officer, notify them that you want to appeal.
If they don't agree, ask to talk with their manager.
If the manager doesn't agree with you, file a Collection Appeal Request (IRS Form 9423) within two days.
If the manager doesn't respond to you, file Form 9423 within four days of making the request and note that you didn't get a response.
If you're not working with a Revenue Officer, call the number on your CP523 notice.
If you don't get help on the phone, file Form 9423.

You have the right to request a CAP appeal, which can be used for a wide range of collection actions, which include rejection, modification, and termination of an installment agreement. A CAP appeal differs from a Collection Due Process (CDP) hearing in that you cannot appeal the decision later in US tax Court.

What Happens After You Receive Notice CP 523?

After the IRS issues Notice CP 523, the following timeline generally takes effect.

If you don’t make a payment or contact the IRS by the date indicated on the notice, the IRS will terminate the payment plan.
After the IRS issues the notice, you have 30 days to appeal a defaulted agreement.
If you don't respond, the failure-to-pay penalty rate will increase from 0.25% per month to 1% per month.
The IRS can file a federal tax lien if there isn't already one in place.
Then, the IRS may seize assets like state tax refunds without sending advance warning.
Finally, the IRS may send a final notice of intent to levy - that gives you 30 days to appeal, and if you don't, the agency can garnish wages or seize assets.

In some cases, the IRS may not wait to issue the levy and start seizing assets. In particular, the IRS can start the levy right away if it thinks tax collection is in jeopardy.

What If You Can No Longer Afford Your Monthly Payment Under the Installment Agreement?

If you are struggling to keep up with the payments of your monthly installment agreement, there are steps you can take to adjust your plan with the IRS. The IRS knows that financial situations change, and they allow taxpayers to make changes to their current payment plans with them. Below are some steps to take:

Assess Your Financial Situation: Review your current situation to determine what is a better monthly amount that is reasonable. Maybe something changed with your income. Identify the key things that have changed since you initially set up your payment plan, as it may be required to provide financial proof.
Contact the IRS: You can call the toll-free number provided on the CP523 notice, or you can go online to make adjustments as well, depending on the type of agreement you have set up.
Submit a New Installment Agreement: You can apply for a new payment plan if your current one does not work for your financial situation. You can potentially reduce your monthly payment amount to something you can afford.
Prepare Supporting Documents: You may be required to submit supporting documentation that verifies your change in financial status.

How to Get the Installment Agreement Reinstated After Receiving IRS Notice CP 523

To reinstate your payment plan, you need to reach out to the IRS directly or get a tax professional to do it on your behalf. Typically, you have to provide some additional financial details to the IRS, and the representative may have to get approval from their manager to reinstate the agreement. The agent may ask why you defaulted and how you are going to avoid default in the future.

They may also ask for some details about your assets, and they may even require you to fill out a new Form 433-D (Installment Agreement). That’s a short one-page form. Finally, the IRS may require you to set up direct debit payments or payroll deductions. That just makes the new payment arrangement more secure.

However, if you are in a streamlined payment agreement and this is your first default in 12 months, you may not have to provide any extra financial details to get the payment plan reinstated, but you may have to pay a reinstatement fee of $50.

If the IRS terminates your agreement due to new unpaid tax liabilities, you may have to pay those amounts before you can restart your payment plan. However, depending on the total amount due, you can roll the taxes into your payment plan. In this situation, you can also get your payment plan reinstated without giving the IRS any additional financial details.

True Story of a Taxpayer Who Received Notice CP523

On Reddit, users often share stories about dealing with the IRS. In this thread, the Reddit user reported that he and his wife were on a payment plan, but then, they received notice CP523 after incurring more tax debt on a new return. Other Reddit users speculated that the original poster (OP) would be able to roll his new balance into the existing payment plan as the total debt was well under $50,000. The OP also said that he was going to offer the IRS larger monthly payments. Another user said that the OP should increase his withholding at work to avoid incurring another tax debt and to increase the chances of the IRS approving the new agreement. This is the type of scenario that's likely to play out if you get this notice.

Get Help Responding to Notice CP 523

To get help after receiving CP 523, speak to a licensed tax professional with expertise in resolving installment agreement problems. Start your search today using the form below and let our algorithm do the hard work of finding the best tax professional. Check out this guide on how to find tax pros using TaxCure to learn more, or look at our page on how to avoid tax relief scams.