Quick overview
Defaulting on an IRS installment agreement occurs when you don’t meet the terms the IRS set for paying a tax liability — most often missed payments, not making required future tax deposits, or failing to file required tax returns. Consequences range from formal notices and a terminated agreement to aggressive collection actions such as liens, levies, and wage garnishments. The IRS continues to charge interest and may add penalties on the unpaid balance until the debt is resolved (IRS.gov).
In my practice as a CPA and tax advisor, I’ve seen taxpayers underestimate how quickly an installment agreement can end and how much collection options can escalate. The good news: many defaults can be fixed or mitigated if you act quickly and follow the appropriate IRS procedures.
Why the IRS treats defaults seriously
Installment agreements are voluntary arrangements that allow taxpayers to pay over time while the IRS protects its ability to collect. When a taxpayer stops complying with the agreement’s terms, the IRS treats the underlying tax liability as still unpaid and may escalate collection tools that were previously on hold. The IRS’s primary goals are to secure payment and to minimize supervisory burden; defaulting short-circuits that cooperative process and returns the account to active collection status (see IRS collection guidance at https://www.irs.gov/).
Immediate and short-term consequences
- Notice of default and potential termination of the agreement: The IRS typically notifies you that the agreement is in default. If the default isn’t corrected, the agreement can be terminated. Once terminated, the full balance remains due immediately.
- Continued penalties and interest: Penalties and interest continue to mount on the unpaid balance. Interest is compounded daily on federal tax debts until fully paid (IRS).
- Resumption of collection actions: While an installment agreement is active, certain collection steps may be on hold. Default can remove that protection and allow the IRS to file a federal tax lien, levy bank accounts, garnish wages, or seize assets in certain cases (IRS collection actions).
- Credit and banking impacts: A tax lien (if filed) becomes a public record and can impede borrowing or refinancing. Even without a lien, bank levies and wage garnishments can disrupt cash flow.
How defaults commonly happen
- Missing monthly payments or paying less than the agreed amount.
- Failing to make required estimated tax payments or payroll tax deposits during the agreement term.
- Not filing required federal tax returns on time.
- Ignoring IRS notices or failing to respond to collection requests.
A commonly cited operational trigger—missing multiple consecutive payments—often prompts the IRS to move toward termination. But the exact circumstances vary by account and agreement type.
How the IRS signals a default and what to watch for
The IRS sends notices and letters explaining the problem and the required corrective action. Watch your mail closely for collection correspondence; the IRS generally uses written notices before escalating to levies or liens. If you receive a default notice, the document explains steps and timelines to cure the default.
Practical fixes: step-by-step actions to recover from default
- Read the notice immediately and follow instructions. Notices usually explain whether you can reinstate the agreement by catching up on missed payments or if a new application is required.
- Bring payments current if possible. If you can pay the missed amounts plus any required administrative charges (if applicable) and penalties/interest, the IRS may reinstate a terminated plan. Acting quickly reduces further accrual of interest and risk of levy.
- Contact the IRS or your assigned revenue officer. Be proactive—explain the hardship and offer documentation (pay stubs, medical bills, bank statements). In many cases the IRS will work with a taxpayer who demonstrates a realistic plan to get current.
- Reapply for an installment agreement if reinstatement is not available. Some defaults force taxpayers to submit a new application; for guidance on that process see FinHelp’s guide on how to reapply for an installment agreement after default.
- Consider alternative resolutions:
- Offer in Compromise (OIC): If you cannot pay the full balance and your reasonable collection potential is low, an OIC may settle the debt for less than the full amount. See when an offer in compromise makes sense at FinHelp: When an Offer in Compromise Could Be the Right Move.
- Partial-Payment Installment Agreement (PPIA): The IRS may accept lower monthly payments based on your financial situation for a limited time; use this when liquidation of assets or full payment is not practical. Read more about PPIAs here: Partial Payment Installment Agreements: When They Make Sense.
- Currently Not Collectible (CNC): If your financial hardship is severe and you can’t make any payment without basic living hardship, the IRS may place your account in CNC status. This halts collection activity temporarily, though penalties and interest usually continue to accrue.
- Request penalty relief if appropriate. If the default was caused by circumstances beyond your control (serious illness, natural disaster), you may qualify for penalty abatement or reasonable cause relief. You must provide documentation supporting the circumstances.
- Keep filing future returns and paying current taxes. Even when you address past-due balances, failing to stay current with ongoing tax obligations is a common way to re-default.
Negotiation and documentation — an operational playbook
- Prepare a simple financial statement that lists income, living expenses, and assets; include supporting documents. The IRS wants to see evidence you’re unable to pay more than you propose.
- Be candid and consistent in your communications; provide requested documents promptly. My experience shows taxpayers who respond within the timeframes are far more likely to secure reasonable arrangements.
- If the IRS assigns a revenue officer, coordinate through that person; they typically have discretion to recommend reinstatement, PPIA, or CNC status depending on the facts.
Pros and cons of common remedies
- Reinstating the agreement: Fastest path back to protected status if you can catch up. But you must have funds available.
- New installment agreement: Useful when your financial situation changed; may require application fees and evidence.
- Offer in Compromise: Can significantly reduce debt, but the approval standard is strict and documentation-heavy. The IRS evaluates reasonable collection potential and future ability to pay.
- Currently Not Collectible: Stops immediate collection but is not debt forgiveness; interest continues and the statute of limitations still runs.
Preventing future defaults
- Choose payment terms you can sustain. If cash flow is irregular, ask for lower monthly payments or a PPIA.
- Use direct debit when feasible—it reduces missed payments and the IRS often credits accounts more reliably.
- Put reminders in your calendar or set up automatic withdrawals.
- Stay current on filings and estimated taxes; failure to file can void the protections of an existing installment agreement.
- Communicate early with the IRS at the first sign of trouble; substantiated hardship explanations often change outcomes.
Costs and timing — what to expect financially
Money you owe continues to accrue interest and may be subject to additional penalties while the account is in default. Also expect administrative steps: collection phone calls, potential lien filings that create public records, and possible levies that seize bank funds or garnish wages. Because these actions are financially disruptive, moving quickly to a fix typically reduces total cost.
When to get professional help
If the balance is large, collection actions have already started, or you’re unsure which remedy fits best (reinstatement, OIC, PPIA, or CNC), consult a qualified tax professional or enrolled agent. In my work, clients achieve stronger outcomes when a practitioner prepares financial packages, communicates with IRS revenue officers, and negotiates realistic solutions.
Practical examples from practice
- Example 1: A client with a short-term cash-flow gap missed two monthly payments. We documented the employer delay in payroll, brought the account current, and the IRS reinstated the agreement without lien action.
- Example 2: A small business owner with persistent negative cash flows defaulted on a streamlined plan. Because current taxes were not being paid, we applied for a PPIA and supplied a detailed financial disclosure; this avoided immediate seizure while a longer-term plan was negotiated.
Useful resources and authoritative guidance
- IRS — Installment Agreements and Collection Guidance: https://www.irs.gov/ (search “installment agreement”)
- Consumer Financial Protection Bureau — consumer protections and dealing with debt collectors: https://www.consumerfinance.gov/
- FinHelp guidance on related topics: How to reapply for an installment agreement after default, When an installment agreement is better than an offer in compromise, and Partial Payment Installment Agreements: When They Make Sense.
Final takeaways
Defaulting on an installment agreement escalates collection risk and increases the total cost of tax debt, but most taxpayers can improve outcomes by acting fast: read IRS notices, bring payments current if possible, and provide documentation for alternative arrangements. Proactive communication with the IRS and, when appropriate, help from a tax professional will usually produce better results than ignoring the problem.
Professional disclaimer: This article provides general information and examples from professional experience. It is not individualized tax advice. Consult a qualified tax professional or the IRS for guidance tailored to your specific situation.
