What Happens if I Default on an Installment Agreement?

During the tax season, people might discover that they owe more in taxes than they can afford to pay. When this happens, the Internal Revenue Service allows taxpayers to set up installment plans to pay their tax burden. In most cases, a taxpayer must make a deposit and pay interest on the outstanding balance.

It is important to note that money owed to the Internal Revenue Service cannot be discharged through bankruptcy. It is considered a nonexempt item and therefore even if you can get other debts discharged through the courts, the financial burden you have for the IRS will remain. Meanwhile, the debt you owe to the agency is increasing because it’s collecting interest. This means more money you owe and a longer period of time you will have to pay for the debt.

As long as the taxpayer makes the installment payments, there are no issues. However, if a taxpayer falls behind on payments or stops paying entirely, the IRS can cancel the installment agreement and put the taxpayer into default. When this happens, the taxpayer receives a notice called a CP523. The notice will inform the taxpayer about the default and the action the IRS can take to recoup the taxes owed. Some of the options the agency has to collect the debt includes:

  • Garnishment of wages
  • Seizure of assets
  • Freezing bank and investment accounts

It is rather obvious that defaulting on a payment arrangement with the IRS is not ideal. But there are things you can do to correct the default. The Internal Revenue Service offers advice on how to get your payment plan back on track with the CP523 notice. Some of the options on the notice include:

  • Make the required payments to bring the agreement current.
  • Contact the IRS and try to renegotiate the installment plan. You may have to provide proof that the payments are more than you can afford. Pay stubs, bank statements or other documentation may be required.

The most important thing you can do is contact the IRS and talk to a customer service representative. Ignoring the notice will make the situation worse. The notice will have a response deadline date included, but in general you should contact the agency within 30 days of receiving the notice.

If you can work out a new arrangement with the IRS, it is important that you not default a second time. It would be wise to review your tax rate to make sure you are setting aside enough in deductions to cover your tax burden. Additional defaults can lead to fines, fees and an even larger tax burden. It could also prevent you from qualifying for an installment plan in the future. For those who are having financial issues, speaking with an experienced legal professional could help people get their financial situations back on track.

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.

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