What Happens If You Miss an IRS Payment Plan Payment?

by Manny Vetti

Missing a payment under your IRS installment agreement puts your plan into default, which could result in termination. Before terminating your plan, the IRS will send a Notice CP523, which gives you 30 days to make the missed payments. If you don’t take action within this period, all your tax debt becomes due, and the IRS can resume collection activities, including wage garnishment, bank levy, and asset seizure.

Already missed a payment, and you have no idea what to do. Our team at Tax Network USA can help figure everything out.  Learn more about our installment agreement resolution options. 

Key Takeaways

  • Defaulting on an installment agreement – It includes missing a payment, owing a new tax debt, failing to file a tax return, or ignoring requests for financial updates.
  • CP523 notice – The notice the IRS sends to a taxpayer to inform them of their intention to terminate their installment agreement plan and levy their assets.
  • How to respond to CP523 – Pay the missed payment and request a reinstatement or modification of the payment amount.
  • Consequences of Ignoring CP523 – Increased penalties and collection activities like bank levies and wages. 
  • How not to default on a monthly payment – Have a tax professional negotiate an amount that fits your budget.

What’s a CP523 Notice?

An IRS CP523 notice is a letter that the IRS sends to inform taxpayers of its intent to terminate an installment agreement plan and levy their assets. If you’ve received this letter, it means you’ve defaulted on your payment agreement. Some of the actions that constitute the default include: 

  • Missing an IRS installment agreement payment
  • Failing to make other required tax payments, such as for estimated quarterly taxes.
  • Failing to file required tax returns
  • Providing false or incomplete information when applying for the installment agreement or payment plan.
  • Failing to provide an updated financial statement upon request.
  • Modifying a payment plan and failing to make payments as per the new agreement
  • Failing to pay the penalties that accrue.  

The CP523 notice will identify the reason for the default, the IRS’s intention to terminate the agreement, the amount owed, and notify the taxpayer of their 30-day window to respond. 

Does the IRS Cancel a Payment Plan After One Missed Payment?

No, but it counts as a default and sends you a CP523, which gives you 30 days to catch up on your payments or modify your plan. If you fail to take any action before the deadline in the notice, the IRS will terminate your agreement and resume collection actions, including bank levies and wage garnishment. Your passport may also be revoked if you have a seriously delinquent tax debt.  

 

What Happens If the IRS Terminates a Payment Plan?

Once the IRS terminates a payment agreement, any remaining balance becomes immediately due. The IRS can also resume collection enforcement activities, such as:

Another consequence is that the failure-to-pay penalty, which was 0.25% during the payment plan, resets to 0.5%, the standard rate. This means increased penalties. 

What Should I Do If I Receive CP523?

If you receive a CP523 from the IRS, there are several steps you should follow:

  • Step 1: Carefully read the notice to make sure you understand what it says, and note the notice’s date, as that’s when the 30-day clock to respond begins.
  • Step 2: Figure out why you missed the payment and decide whether it’s a one-off situation due to a temporary cash flow or banking error, or a long-term cash-flow problem with missed payments becoming more and more likely.
  • Step 3: If the missed payment was a one-off, make the payment as quickly as possible and contact the IRS to request reinstatement of the payment plan or installment agreement.
  • Step 4: If a new tax bill triggered the CP523, see if you can roll that new balance into your existing payment agreement. If you do this, understand that you’ll likely have larger monthly payments and/or have to make payments for a longer period of time.
  • Step 5: If there are long-term cash flow problems, either request a modified payment agreement or consider alternative tax payment options.

If you decide to modify your payment plan, it’s important that you budget carefully to limit the interest and penalties that accrue as much as possible without feeling overwhelmed by the agreed-upon amount. We recommend working with a tax professional to find the perfect balance. 

Can You Reinstate an IRS Payment Plan After Missing a Payment?

Yes, but you may have to provide your financial information if you don’t qualify for an automatic reinstatement. This may include bank statements, pay stubs, and expense summaries to prove your ability to resume payments.   

This is the fastest and easiest option to deal with defaulting a payment, assuming your missed payment was an isolated occurrence. If you’re trying to reinstate a Simple Payment Plan, you may be able to reinstate your plan by paying online through the IRS’s Direct Pay Tool or your online account. 

If the IRS denies your reinstatement request, you can appeal its decision by filing Form 9423 through the Collection Appeals Program (CAP), which allows taxpayers to challenge the termination before levies and seizures happen.

Can You Modify the Payment Amount?

Yes, you can request the IRS to adjust your monthly payment amount to reflect your current financial situation. If your expenses have increased, you have experienced a job loss, or any other life change has made it impossible to pay the monthly payment, you might qualify for a change.

For the IRS to agree to lowering your monthly payments, you’ll need to demonstrate financial circumstances that justify smaller payments. This might require you to submit IRS Form 433-F, Collection Information Statement.

If you’re not able to pay the minimum monthly balance required to clear your tax debt within the remaining collection period, you can apply for a Partial Payment Agreement (PPIA). Under this agreement, you pay what you can afford each month until the tax debt expires and the balance is forgiven.

On the other hand, you can also decide to modify your payment amount to pay more if you want to reduce the amount you’ll pay in interest and penalties.

What If I Can’t Afford a Payment Plan?

If a payment plan or installment agreement modification or reinstatement isn’t possible, then you’ll need to consider alternatives for paying off your tax balance. Here are some options you can explore:

How To Avoid a Payment Plan Default

Avoiding a default is far easier than fixing things after the IRS sends you CP523. Here are some things you can do to reduce the chances of defaulting on your payment plan:

  • Set up Direct Debit so the IRS automatically debits money from your checking account each month. This has a setup fee unless you qualify for a low-income waiver.
  • Keep a close eye on your checking account balance to ensure there’s always enough money to cover your bills that are automatically debited from your account.
  • If possible, set up a longer payment agreement with smaller monthly payments. You might have to pay more in the long run due to higher interest rates, but the smaller monthly payments may make it easier to avoid missing a payment.
  • Stay current with your tax filings and estimated tax payments. Failing to do either could result in a default, even if you never miss a payment for your payment agreement. 

Need Help Responding to a CP523 Notice?

Tax Network USA can help when the IRS tries to terminate your payment plan or installment agreement. Our tax pros can help reinstate a terminated agreement, revise an existing one, or find another tax resolution solution. Schedule a free consultation to discuss your installment agreement options through our online contact form or by calling (855) 225-1040.

Frequently Asked Questions (FAQs)

Here are common questions on missing IRS monthly payments:

How many missed payments trigger a CP523?

One missed payment can trigger a CP523 notice. Keep in mind that the IRS sends out a CP523 whenever a taxpayer defaults on their payment plan or installment agreement. Meaning you could trigger the notice with other actions, such as failing to provide updated financial information upon request. If you’ve received a CP523, read it carefully to see why the IRS sent it.

Will the IRS charge a fee to reinstate a payment plan or installment agreement?

Yes, you need to pay for certain reinstated or restructured installment agreements. For example, it costs $10 to reinstate an installment agreement online. If your reinstatement is through phone, mail, or in person, it may cost $89 or $43 if you prove you’re a low-income taxpayer. 

Will defaulting on an IRS payment plan or installment agreement affect my credit?

No, defaulting doesn’t directly affect your credit score because the IRS doesn’t report to consumer credit bureaus. However, collection actions resulting from default, such as Federal Tax Liens that appear on public records, may affect your approval with creditors, who may consider this a red flag. 

What do I do if the deadline to respond to the CP523 notice has passed?

You’ll have 30 days to appeal the IRS decision to terminate your IRS agreement. Alternatively, you can request a standard reinstatement or explore other tax relief options, such as an OIC or CNC status. 

If the IRS terminates my payment plan or installment agreement, will they take my house?

Not exactly. The IRS has the legal right to seize assets after terminating a payment plan, but seizing a primary residence is rare. The IRS is likely to target your bank account, wages, and tax refunds – seizing a house is a last resort. 

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