CP523: installment agreement default, the 30-day termination clock and the CAP appeal

What the notice means

The IRS CP523 page: “the IRS is informing you of the intent to terminate your installment agreement and seize (levy) your assets. You have defaulted on your agreement.” Spanish (CP523 SP) and business (CP623) versions exist; the field equivalent is Letter 2975. IRM 5.19.1.6.4.19 lists what the notice states: the reason for the proposed termination, the corrective action needed, that it is the notice of intent to levy, the right to appeal, and that “If corrective action is not taken, the IA will be terminated 30 days from the date of the notice.”

IRM 5.14.11.4 describes the mailing: “The notice or letter is sent by certified mail for taxpayers with domestic addresses, or by registered mail if taxpayers have foreign addresses,” and for joint filers it goes to both spouses separately even at the same address. The same section is careful about terminology: an account that has received a CP523 is “commonly referred to as a ‘defaulted agreement’” but “the agreement will not be terminated until the expiration of the 30 day period beginning on the date the notice is issued.”

The IRS page also notes that the notice “explains the denial or revocation of a United States passport” under the FAST Act for seriously delinquent debt; see passport certification.

Why the client got it

IRM 5.14.11.3 lists the only permitted reasons: failure to pay an installment when due; failure to pay another tax liability when due (including on related TINs, such as a sole proprietor's employment tax account); failure to provide an updated financial statement on request; inaccurate or incomplete information given before the agreement; and failure to pay a modified amount after a financial review. It then states: “Installment agreements may not be defaulted nor terminated for reasons other than those listed in this section.” These track IRC 6159(b)(2) through (4). A delinquent return is not on the list; the IRM notes that an open return delinquency “does not cause default of the status 60 balance due accounts.”

In practice IRM 5.19.1.6.4.19 says agreements are terminated for “Missed payments (usually the skipped payment and a second missed payment),” new liabilities not paid when due, a bad check, or failure to provide a requested financial update. A balance due on the current-year return is the most common surprise: the client made every installment but did not pay the new year in full.

Two situations do not require this notice. IRM 5.14.11.2 allows termination without advance notice when collection is in jeopardy (also IRC 6159(b)(5)). And IRM 5.19.1 notes that individual shared responsibility payment liabilities under the Affordable Care Act do not default an agreement.

Deadlines and what happens if they pass

IRM 5.14.11.4: “No levies may be issued on tax periods included in agreements for 90 days after mailing Notice CP 523 or Letter 2975 (DO).” That 90 days is made of the 30-day termination period and “an additional 30 days after the date of the termination of the agreement,” each extended by 15 days for mailing of appeals. The status change “occurs thirteen (13) weeks (or cycles) after mailing Notice CP 523,” which the IRM says “allows for 90 days between the date of the notice and the change to balance due status.”

The appeal rights come from IRC 6159(e), which requires “an independent administrative review of terminations of installment agreements,” and the IRS delivers it through the Collection Appeals Program. IRM 5.14.11.7: “the taxpayer has 30 days from the date of proposed termination (default) of the installment agreement (Letter 2975(DO)/CP 523) to submit Form 9423,” and “Once the agreement is terminated, the taxpayer has an additional 30 days to submit Form 9423.” One caution: “If a CAP hearing is requested prior to termination, the taxpayer may not appeal the decision again once the termination takes effect.” No levy may be taken on the agreement periods while the appeal windows are open.

How to respond

1. Read the stated reason and verify it on the transcript. A payment that posted late, posted to the wrong period, or a new liability that was in fact paid are IRS-error defaults; IRM 5.19.1.6.4.19 says to restore those “at the previous terms” and “Waive the reinstatement user fee.”
2. Cure the default before day 30 if possible: make up the missed payment, pay the new liability in full, or supply the requested financial statement. IRM 5.14.11.5 is mandatory on this point: “If agreements are in default (not yet terminated) they must be reinstated if taxpayers remedy the default (unless there is another reason for default).”
3. Call the number on the notice and ask for reinstatement; the IRS page says to call “to make sure we have a record of your action so that we can reinstate your installment agreement.” Expect the reinstatement fee ($89 by phone or mail, $10 through the Online Payment Agreement at the July 1, 2024 rates in IRM 5.19.1.6.4.6).
4. If the client cannot cure it, ask to revise the agreement. IRM 5.19.1.6.4.19 reinstates and revises an agreement when the taxpayer “requests to lower payment amount” and the account meets Simple Payment Plan criteria; otherwise a financial statement (Form 433-F) is required and a partial payment agreement is the route when the balance cannot be paid before the CSED.
5. If the client disagrees with the default itself, file Form 9423 within 30 days of the notice date (IRM 5.14.11.7 allows 15 days for mailing). State the facts and attach proof of payment. See the Collection Appeals Program and the CAP statement template. Decide whether to appeal the proposed termination now or the termination later; the IRM allows only one.
6. Fix the cause. If the default came from a current-year balance, adjust withholding or estimates; if from a new business liability, address deposits. IRM 5.14.11.5 lists compliance with filing, estimated tax and federal tax deposits among the reinstatement considerations.

If the client has unfiled returns, the IRM has two rules. A default cured within 45 days must be reinstated “regardless of unfiled returns or CSED issues. We cannot legally terminate an IA for CSED or unfiled returns.” After 45 days, termination or rejection of reinstatement “is legally allowed,” and the IRS will not reinstate “until all delinquent returns are secured for the preceding six years” (IRM 5.19.1.6.4.19).

What the IRS does next

A cured default is reinstated, the status returns to 60 and the TC 971 AC 063 stays on the modules. An uncured default terminates on day 30 of record; at 13 cycles the account moves to status 22 (ACS) or 26 (field), Master File generates a TC 971 AC 163, and IRM 5.14.11.4 lists the effects: the failure to pay penalty rate returns to one half percent if it had been reduced, the installment agreement indicator is removed, and systemic levies are allowed. From there the account is an ordinary balance due: ACS letters, possible lien filing, and levy on wages and bank accounts once any outstanding CDP rights have been offered.

An agreement reinstated after termination is treated as a new original agreement if the account has left status 6X, and the skip indicator is reset (IRM 5.19.1.6.4.19). Taxpayers entering a partial payment agreement who defaulted within the prior 24 months are required to pay by direct debit or payroll deduction unless they are unbanked and unemployed or self-employed (IRM 5.19.1.6.5).

Related notices

• CP521: the monthly reminder that precedes a default.
• CP504 and LT11: the levy notices that follow a terminated agreement.
• Letter 3172: notice of federal tax lien filing, possible immediately on default if the lien box was checked.
• CP14: the new balance due that often causes the default.

Questions practitioners ask