The IRS will charge you a failure-to-pay penalty and interest, and your installment agreement may be terminated

Missing an IRS installment payment triggers two immediate consequences: a failure-to-pay penalty of 0.5% of the unpaid tax per month (or part of a month), and interest that accrues daily on the unpaid balance. The penalty and interest compound, meaning you owe interest on the interest. If you miss a payment by more than a few days, the IRS will also send you a notice that your installment agreement is in default and may be terminated within 30 days unless you bring the account current.

What "current" means depends on how late you are. A payment that is 1 to 10 days late is typically treated as on time if you pay it without the IRS having to contact you. A payment that is more than 10 days late puts you in default. Once you are in default, you have 30 days from the notice date to pay the full amount owed plus any penalties and interest, or to contact the IRS to request reinstatement of the agreement.

If your agreement is terminated, the full remaining tax balance becomes due immediately. The IRS can then pursue collection through wage garnishment, bank levies, or a lien against your property. You will also lose the benefit of the installment plan, meaning you cannot spread payments over time anymore.

Key Takeaways

  • A missed payment triggers a 0.5% monthly failure-to-pay penalty plus daily interest on the unpaid balance, both of which compound.
  • Payments more than 10 days late put your installment agreement in default, and the IRS will send a notice giving you 30 days to catch up or request reinstatement.
  • If your agreement is terminated, the entire remaining tax balance becomes due immediately and the IRS can pursue collection through wage garnishment, bank levies, or liens.
  • Contact the IRS before the 30-day deadline to request reinstatement; waiting until after termination makes collection action more likely.
  • Reinstating an agreement usually requires paying the missed payment plus penalties and interest, though the IRS may negotiate a partial catch-up if you cannot pay in full.

How the failure-to-pay penalty and interest are calculated

The failure-to-pay penalty is 0.5% of the unpaid tax for each month or part of a month that the tax remains unpaid. If you owe $5,000 and miss a payment by 45 days, the penalty is 0.5% × 2 months (rounded up) = 1% of $5,000, or $50. This penalty is added to your balance and you owe interest on it.

Interest accrues at a rate set by the IRS quarterly. As of 2024, the rate is 8% per year, compounded daily. Interest is calculated on the unpaid tax, the penalties, and any previously accrued interest. The longer the account remains in default, the faster the balance grows. A $5,000 unpaid tax with interest at 8% annually costs roughly $1.10 per day in interest alone.

Both the penalty and interest continue to accrue after your agreement is terminated. If you do not pay or make a new arrangement within 30 days of termination, collection action begins and the IRS may add additional penalties for failure to file or failure to pay, depending on your tax situation.

What happens during the 30-day default period

When you miss a payment by more than 10 days, the IRS sends a Notice of Default (usually Form 668-A or a letter) stating that your installment agreement will be terminated in 30 days unless you take action. This notice includes the amount you owe to bring the account current, the date by which you must act, and instructions for contacting the IRS.

During these 30 days, you have two options: pay the full amount owed to bring the account current, or contact the IRS to request reinstatement. You do not have to wait for the IRS to call you. If you call the IRS at the phone number on the notice and explain your situation—a temporary hardship, a missed payment due to a bank error, or a change in income—the IRS may agree to reinstate the agreement without terminating it.

If you do nothing during the 30-day period, the agreement terminates automatically on day 31. After termination, the IRS considers the entire remaining tax balance due immediately and will begin collection action. At that point, requesting reinstatement becomes much harder, and the IRS is more likely to pursue wage garnishment or bank levies.

How to reinstate a defaulted installment agreement

To reinstate an agreement, you must contact the IRS before the 30-day default period ends. Call the number on your default notice or the IRS at 1-800-829-1040. Have your tax ID, the tax year in question, and your current contact information ready.

The IRS will ask why you missed the payment and whether you can bring the account current. "Current" means paying the missed payment plus any penalties and interest that have accrued since the missed payment. If you cannot pay the full amount, explain your situation. The IRS may agree to a partial catch-up plan, where you pay part of the arrears immediately and add extra amounts to your regular monthly payment for the next few months.

Reinstatement is not may provide. If you have missed payments before or if the IRS believes you cannot sustain the agreement, they may refuse reinstatement and proceed with collection. However, if this is your first missed payment and you can show a reasonable cause (job loss, medical emergency, banking error), reinstatement is usually granted.

Once reinstated, your original agreement remains in place with the same monthly payment amount, unless you negotiate a new payment schedule. The missed payment and accrued penalties and interest are added to your balance, so your total debt is now higher than it was before the default.

Collection action after termination

If your agreement is terminated and you do not reinstate it within 30 days, the IRS shifts to collection mode. The agency can issue a wage garnishment (also called a wage levy), which requires your employer to withhold a portion of your paycheck and send it to the IRS. The amount withheld is calculated based on your filing status and the number of dependents you claim, and it can be substantial—often 25% or more of your take-home pay.

The IRS can also issue a bank levy, which freezes your bank account and transfers funds to the IRS to pay down the debt. Unlike a wage garnishment, which is ongoing, a bank levy is typically a one-time event, but the IRS can issue multiple levies if the debt is not paid.

A tax lien may also be filed against your property. A lien does not seize the property, but it gives the IRS a legal claim to it. If you sell the property, the IRS gets paid from the sale proceeds before you do. A lien also damages your credit and makes it harder to borrow money or refinance a mortgage.

Preventing default in the first place

Set up automatic payments through the IRS Direct Pay system or through your bank's bill-pay feature. Automatic payments remove the risk of forgetting a due date and ensure the IRS receives payment on time. You can change or cancel automatic payments at any time if your circumstances change.

If you know you will have trouble making a payment, contact the IRS before the due date. Explain your situation and ask about a temporary deferment or a modification of your agreement. The IRS is more willing to work with you if you reach out proactively than if you wait until after you have missed a payment.

Keep copies of all payment confirmations and correspondence with the IRS. If a payment is lost in the mail or misapplied to the wrong tax year, you will need proof that you paid. The IRS's payment records and yours should match; if they do not, contact the IRS immediately to correct the record.

What to do if you cannot afford your current payment

If your financial situation has changed and you can no longer afford your monthly payment, do not simply stop paying. Instead, contact the IRS and request a modification of your agreement. A modification adjusts your monthly payment amount based on your current income and expenses. The IRS uses a form called the Collection Information Statement (Form 433-F for individuals) to assess your ability to pay.

Modifications can lower your monthly payment significantly, but they also extend the length of the agreement. If you originally had a 5-year plan and you modify it to a lower payment, the plan may now run 6 or 7 years. The total interest and penalties you pay will be higher because the debt sits longer, but the monthly burden is lighter.

You can request a modification by calling the IRS or by submitting Form 433-F by mail. The IRS typically responds within 30 days. If you are in default when you request a modification, the modification request does not automatically stop the 30-day default clock, so contact the IRS immediately to ensure your request is processed before termination.

Frequently Asked Questions

Can the IRS garnish my wages if I have an installment agreement?

No, not while the agreement is active and you are making payments on time. Wage garnishment is a collection tool the IRS uses after an agreement is terminated or if you never had an agreement. If you default on your agreement and do not reinstate it, wage garnishment becomes possible.

How long does it take for the IRS to terminate my agreement after I miss a payment?

The IRS sends a default notice and gives you 30 days to catch up or request reinstatement. If you do nothing, the agreement terminates on day 31. Collection action can begin immediately after termination, though it often takes a few weeks for the IRS to issue a wage garnishment or levy.

If I reinstate my agreement, do I have to pay the penalties and interest that accrued?

Yes. Reinstatement requires you to pay the missed payment plus all penalties and interest that have accrued since the missed payment. These amounts are added to your balance. You cannot reinstate without paying them, though you may negotiate a partial catch-up if you cannot pay the full amount at once.

What if my payment was late because my bank made a mistake?

Contact the IRS and provide proof of the error from your bank. The IRS may waive the failure-to-pay penalty if you can show that the delay was not your fault. Interest will still accrue, but the penalty may be removed. Get written confirmation from your bank about the error and send it to the IRS along with your request.

Can I get out of an installment agreement if I cannot afford it?

You can request a modification to lower your payment, but you cannot simply cancel the agreement without paying the debt. If you stop paying without requesting a modification, your agreement will default and collection action will follow. A modification is your best option if your circumstances have changed.