Defaulted Installment Agreements
The IRS expects taxpayers to pay all of their tax liabilities in full, at the latest, at the time the liabilities are due. When this is not possible, the IRS may allow taxpayers to pay their liabilities during a period of time through a monthly payment plan. These payment plans are called installment agreements. We address some of the various types of installment agreements available to taxpayers, including streamlined, guaranteed, and long term installment agreements, HERE.
Utilizing an installment agreement to pay outstanding liabilities may help the taxpayer ensure that the IRS does not take enforced collection action, such as garnishing the taxpayer’s wages and bank accounts, for those liabilities. However, various circumstances may cause the taxpayer’s installment agreement to default, leaving the taxpayer vulnerable to enforced collection action and potentially requiring the taxpayer to start over in the negotiation process to secure a new installment agreement. Below, we address some of the common events that trigger a defaulted installment agreement, as well as ways to cure these issues and reinstate the installment agreement.
Causes of Defaulted Installment Agreements
1. Failure to pay an installment payment when due under the terms of the agreement.
2. Failure to pay another tax liability at the time such liability is due.
3. Failure to provide an updated financial statement upon request. For example, when the IRS grants a partial payment installment agreement, the IRS may request updated financial information to monitor a taxpayer’s ability to pay. Generally, the terms of an installment agreement require the taxpayer to pay their liabilities in full by the collection statute expiration date (CSED). This date is generally 10 years from the date the tax liability was assessed. When it is impossible for a taxpayer to pay their liabilities in full by the CSED, but the taxpayer has some ability to pay, the IRS may grant the taxpayer a partial payment installment agreement. The IRS determines the taxpayer’s ability to pay by examining the taxpayer’s financial circumstances, including the taxpayer’s equity in assets and monthly income and expenses. When a taxpayer receives a partial payment installment agreement, the IRS periodically requests updated financial information to determine if the taxpayer’s financial situation has improved and if the taxpayer can afford to make increased monthly payments.
4. Failure to provide financial information. The IRS may request financial information from a taxpayer before granting an installment agreement or throughout the course of the installment agreement. This financial information may include information and documents to verify the taxpayer’s equity in assets and monthly income and expenses. The information the taxpayer provides must be accurate and complete.
5. Failure to pay a modified payment amount based upon updated financial information. If the IRS determines that a taxpayer’s financial circumstances have improved and the taxpayer can afford an increased monthly payment, the IRS may require the taxpayer make the increased monthly payment instead of the monthly payment negotiated at the beginning of the installment agreement.
For more information, see IRM 5.14.11.3.
IRS Procedure Related to Defaulted Installment Agreements
When a taxpayer does not meet the terms of an installment agreement, the IRS should notify the taxpayer in writing and provide the taxpayer with 30 days to comply with the terms of the agreement before terminating the installment agreement. Generally, the taxpayer is notified in writing via Notice CP523, Installment Agreement Default Notice — Notice of Intent to Levy. The notice or letter is generally sent by certified mail to the taxpayer. For taxpayers who file joint returns, the IRS sends the notice or letter to both spouses separately, even if the spouses live at the same address. Notice must be provided for all defaulted agreements, except in jeopardy situations.
A defaulted installment agreement will not be terminated until the expiration of the 30 day period beginning on the date the notice is issued. No levies may be issued on tax periods included in agreements for 90 days after mailing Notice CP523.
For more information, see IRM 5.14.11.4.
Options to Reinstate a Defaulted Installment Agreements
The taxpayer has 30 days from the date of the CP523 before the IRS may terminate the installment agreement. This gives the taxpayer time to correct the issue that caused the default and reinstate the installment agreement. The IRS may reinstate the agreement in the following circumstances:
1. The taxpayer pays the new liability. If the agreement is in default because of an additional liability and the taxpayer pays the additional liability in full within 30 days of the date of the CP523.
2. The new liability is added to the installment agreement. If the agreement is in default because of an additional liability and the taxpayer cannot pay the additional liability within 30 days from the date of the CP523, the IRS may add the additional liability to the liabilities currently included in the installment agreement, if the addition of that new liability will result in no more than two additional monthly payments added to the installment agreement and the agreement will not extend beyond the CSED. However, a lien determination is required for these agreements.
3. The agreement meets streamlined criteria and the taxpayer has not defaulted an installment agreement in the 12 months prior to the current default. To meet the streamlined criteria, the new and old liabilities must amount to $50,000 or less and the installment agreement must resolve all balances due prior to the expiration of the CSED. The minimum payment amount in these circumstances is determined by dividing the total liabilities by 72 months. (Also check the temporary streamline processing criteria offered by the service center for liabilities of less than $100,000. The test program is scheduled to run through September 30, 2017.)
4. The taxpayer timely provides complete and accurate financial information. If the installment agreement defaults because the taxpayer did not timely provide updated financial information requested by the IRS or provided incomplete or inaccurate financial information, the taxpayer may provide the updated or corrected financial information within 30 days from the CP523. The IRS may consider reinstating the installment agreement, or, if the financial information shows that the taxpayer’s financial circumstances have improved, the IRS may request an increased monthly payment. The taxpayer may negotiate with the IRS and provide additional financial information to substantiate a realistic monthly payment. If the IRS will not accept the taxpayer’s proposed monthly payment, the taxpayer may appeal the IRS determination and present their case to an appeals officer.
For more information, see IRM 5.14.11.5.
Appeal of Defaulted Installment Agreements
If the taxpayer cannot come to an agreement with the IRS regarding reinstatement of the installment agreement, the taxpayer has the right to file an appeal and can request a hearing with the IRS Office of Appeals. Taxpayers who request an appeal will follow the instructions in IRM 5.1.9.4.2, “Request for a CAP Appeal.” No levy action may be taken on the periods included in the agreement during the time period when taxpayers may appeal the defaulted installment agreement. For more information, see IRM 5.1.9.4 Collection Appeal Rights and IRM 5.14.9.8 on the “Collection Appeals Program.”
For more information, see IRM 5.14.11.7.