Can the IRS Walk Away from an Installment Agreement?

Taxpayers who owe the IRS back taxes often try to work out terms with the IRS for the balance. This often involves an installment agreement.

Once established, the IRS often terminates the agreements and it often does so without any notice or explanation as to why it did so. This can be extremely frustrating for taxpayers who are only trying to comply.

When this happens, the obvious question is whether the termination was legitimate. The tax code does not give the IRS unlimited authority to cancel an installment agreement. There are specific procedures it must follow, specific notice it must provide, and specific grounds it must have. If it terminates without meeting those requirements, the termination may be invalid. And if the agreement is still in effect, the IRS may have no right to sue.

This is the very question in the United States v. Paparatto, No. [docket number] (D.N.J. Mar. 5, 2026), case. It involves taxpayer owner who entered into an installment agreement with the IRS, made payments for years, and then found himself the target of a federal lawsuit after the IRS claimed his agreement was terminated. It begs the question as to whether the IRS can simply walk away from an installment agreement and then sue the taxpayer to collect?

Facts & Procedural History

The taxpayer in this case was the sole owner and president of a construction company. He was the only signatory on the company’s bank accounts and had full access to its financial records. He met weekly with the company’s bookkeeper to review finances and outstanding obligations.

The company failed to file Form 941 quarterly payroll tax returns in 2008. In January 2009, an IRS revenue officer hand-delivered two notices to the business: one advising it of the IRS’s plan to contact third parties about the outstanding tax liability, and another notifying it that the IRS intended to levy its income, bank accounts, and property.

While working on the business collection side of it, the IRS assessed trust fund recovery penalties against the taxpayer personally for multiple tax periods. The penalties were for nearly $1 million. This was in early 2012. Eight months later, in September 2012, the taxpayer transferred his interest in the family home to his wife by quitclaim deed for $1.00. After the transfer, he reportedly had no assets. He continued to live in the house. A few months after the transfer, he signed a mortgage on the same property as a co-owner.

The taxpayer eventually entered into an installment agreement with the IRS. IRS records show that he made consistent monthly payments from early 2015 onward. Payments appear in IRS records through at least November 2020. The IRS later claimed to have terminated the agreement, but the parties did not agree about when and why.

The government filed suit in federal district court in October 2021 for the penalty assessments and to foreclose its tax liens against the residential property. In September 2025, the government moved for summary judgment. The district court had to decide whether the IRS was entitled to judgment as a matter of law.

The Trust Fund Recovery Penalty

As we have explained on this site before, Section 6672 of the tax code imposes personal liability on individuals who are responsible for collecting and paying over payroll taxes withheld from employees’ wages and who willfully fail to do so. The penalty equals the full amount of the unpaid trust fund taxes. Once assessed, it attaches to the individual’s assets, not just the business entity assets. This makes it one of the more powerful tools in the IRS’s arsenal for collecting unpaid tax debts.

The term “trust fund” reflects the nature of the tax itself. When an employer withholds income taxes and the employee share of Social Security and Medicare taxes from an employee’s paycheck, those funds are not the employer’s money to use. The employer holds them in trust for the federal government and must remit them with the quarterly Form 941 filing. If the employer fails to remit them, the IRS can look past the business entity and hold the responsible individuals personally liable.

Two elements must be established for the penalty to apply. First, the person must be a “responsible person,” which courts define as someone with meaningful authority and control over the company’s financial affairs. Second, the failure to pay must be “willful,” a term courts have interpreted broadly to include not just deliberate evasion but also reckless disregard of a known obligation. In this case, the taxpayer was the sole owner, the company’s president, and the only signatory on its bank accounts. He reviewed the finances weekly. He likely met the definition of a responsible person under any reasonable reading of the facts. But this case is not about that, it is about the collection side of it.

What Is an IRS Installment Agreement?

The IRS installment agreement is more than just a contractual agreement. It comes with certain rights.

The rules for installment agreements are found in Section 6159. These rules allow the IRS to enter into written agreements with taxpayers allowing them to pay a tax liability in installments when doing so will facilitate full or partial collection of the liability.

An installment agreement is not a unilateral IRS decision. It is a formal written agreement between the taxpayer and the government. The terms are negotiated based on the taxpayer’s financial situation. The taxpayer commits to monthly payments, and in exchange, the IRS agrees to hold off on enforced collection for as long as the agreement remains in effect.

The distinction matters. This is not the IRS granting a favor. It is a binding contractual arrangement with legal consequences for both parties. And like any contract, it comes with obligations on both sides.

What the IRS Cannot Do While an IA Is in Effect

When one thinks of the prohibitions on the IRS for installment agreements, we often think of the levy and litigation restrictions.

The levy and litigation restrictions for active installment agreements are found in Section 6331(k). Specifically, subsection (2)(C) expressly prohibits the IRS from levying on a taxpayer’s property to collect a liability that is the subject of an active installment agreement. Treasury Regulation Section 301.6331-4(a) restates the same prohibition. These rules mean that a taxpayer who is honoring the agreement is protected from asset seizure for the covered liability.

The protection does not stop there. Section 301.6331-4(b)(2) of the regulations prohibits the IRS from referring a case to the Department of Justice for civil litigation against a person named in an installment agreement when the levy prohibition applies. This is the rule that makes the installment agreement particularly significant in the context of a collection lawsuit. The IRS cannot sue to collect a liability that is still governed by an active installment agreement.

These restrictions exist for a reason. Congress wanted to give taxpayers who are cooperating with the IRS some measure of stability. A taxpayer who enters into a payment plan and honors it should not have to worry about federal agents seizing property or about a lawsuit landing on their doorstep while the checks are still clearing. The installment agreement framework was designed to prevent exactly that outcome.

When Can the IRS Terminate the Agreement?

If you read the paragraphs above closely, you no doubt saw the word “active” to describe installment agreements. To the IRS, an IA is either active or terminated. And as many of our readers know, the IRS often terminates IAs in error and without giving any reason or explanation for doing so.

But the law does not let the IRS simply walk away from an installment agreement whenever it wants to. Section 6159(b)(2) through (5) of the tax code identify the specific circumstances under which the IRS can terminate an installment agreement. Among the permitted grounds are failure to make timely payments, providing inaccurate financial information, and a material change in the taxpayer’s financial condition. The statute also requires the IRS to provide the taxpayer with notice of the intent to terminate and an opportunity to respond before the agreement can be cancelled.

The notice requirement is not a formality, even though the IRS often fails to comply with it. It is intended to give the taxpayer a genuine opportunity to contest the termination, cure a default, or negotiate a revised arrangement. It is also intended to create an evidentiary record. If the IRS later claims the agreement was properly terminated, it should be able to point to a notice it sent, the grounds it identified, and the taxpayer’s response or lack thereof.

If the IRS terminates an agreement without following these procedures, the termination is improper. And an improper termination may not extinguish the agreement’s legal effect. That is the key issue in this case.

Can the IRS Sue on a Liability Covered by an Installment Agreement?

In this case, the government filed suit and then moved for summary judgment on both of its claims. Its argument, in short, was that the installment agreement had been terminated, the taxpayer was in default, and the IRS was therefore free to pursue the debt through litigation. The taxpaye argued the opposite: that the agreement had been improperly terminated, then reinstated, and then improperly terminated again.

The court looked to an earlier decision from the same district. In that other case, the IRS had asked the court to assume, for the sake of argument, that the termination was improper, but to grant summary judgment anyway on the theory that there was simply no valid agreement left to block the litigation. The court in the other case rejected that approach outright. Accepting the government’s position, it reasoned, would render the taxpayer protections in the installment agreement statute meaningless. The IRS could terminate an agreement for any reason, or no reason, and then proceed with a lawsuit as if the agreement had never existed. The only remedy the taxpayer would have is a damages suit under Section 7433 for a wrongful levy for the IRS violation, which is a far weaker protection than the one Congress actually built into the statute.

Given this, the court in the present case adopted the reasoning of the prior court case and applied it here. Because the circumstances of the termination were genuinely disputed, the court could not simply accept the government’s assertion that the agreement was properly terminated and proceed to judgment. The validity of the termination was a material fact, and it was in dispute.

The court even noted that the record in this case suggested that the IRS did in fact terminate the installment agreement wrongfully. The court noted that one IRS certificate of assessments and payments showed an installment agreement that was active and being paid from early 2015 onward, with consistent monthly payments through mid-2017. That same exhibit, however, reflected a termination date of July 2019, not 2017, which appeared to contradict the government’s stated timeline. Another exhibit showed that payments made after the claimed termination date were being logged as overpayment credits rather than installment payments, raising questions about what the IRS was actually treating as the termination date. A third exhibit included payment records for months that were missing entirely from the first.

None of these inconsistencies proved the taxpayer’s case. But they did exactly what factual disputes are supposed to do at summary judgment: they raised genuine questions that a fact-finder would need to resolve. The court noted all of this and concluded that the circumstances of the termination were too contested to resolve on the papers.

The Takeaway

The IRS often terminates installment agreements and does so wrongfully. It often does not issue any notice or explanation. As this court case shows, the IRS cannot do this. Once there is an installment agreement, the IRS is precluded from levying on the taxpayer’s assets and it is also precluded from bringing suit to collect the taxes. This case shows that the courts are willing to enforce the protections provided in the statute. The IRS has to give proper notice, identify valid grounds, and create a record that can withstand scrutiny. Otherwise, it cannot levy or file suit to collect.

Watch Our Free On-Demand Webinar

In 40 minutes, we'll teach you how to survive an IRS audit.

We'll explain how the IRS conducts audits and how to manage and close the audit.  

Register Now