Does an IRS Payment Plan Stop a Bank Levy?

If you can pay the IRS over time, a payment plan is often the fastest way to unfreeze a levied bank account. That is not my opinion. It is built into two separate Code sections.

But the protection attaches to a real installment agreement request, not to a phone call where you say "I would like a payment plan someday." The difference matters during a 21-day hold.

Two rules working together

Rule 1: no new levies while a plan is pending or in effect

IRC § 6331(k)(2) says no levy may be made for the unpaid tax:

• While an offer by you for an installment agreement under § 6159 is pending with the IRS.
• If the offer is rejected, during the 30 days after rejection, and during a timely appeal of the rejection.
• While the agreement is in effect.
• If the IRS terminates the agreement, during the 30 days after termination, and during a timely appeal of the termination.

IRM 5.14.1.5 repeats the list for IRS employees and adds two exceptions: you waive the restriction in writing, or collection is in jeopardy.

Rule 2: existing levies are released

IRC § 6343(a)(1)(C) says the IRS shall release a levy when "the taxpayer has entered into an agreement under section 6159 to satisfy such liability by means of installment payments, unless such agreement provides otherwise." The statute adds that the IRS is not required to release if release would jeopardize its secured creditor status.

That "unless such agreement provides otherwise" is not boilerplate. IRM 5.11.2.3.1.6 gives the exact example: a taxpayer asks for an installment agreement in response to a bank levy, and the IRS grants it, but the agreement expressly says the levy will not be released. In that case this ground does not apply. Read the terms before you sign.

What makes a request "pending"

This is where people lose. The IRS does not treat every request as pending. IRM 5.14.1.3 says an installment agreement request qualifies for pending status only when you provide all of the following:

1. Enough information to identify you, generally your name and taxpayer ID.
2. The tax liability to be covered.
3. A specific monthly or other periodic payment amount.
4. Compliance with filing requirements.
5. A completed Collection Information Statement when one is required. The IRM says a CIS may be completed verbally or in writing.

The same section lists situations where a request is not treated as pending:

• Delinquent returns are required. You must file and then submit a new proposal.
• You are pursuing another resolution, like currently not collectible status or an offer in compromise.
• The request was made to delay collection action (IRM 5.14.1.3, cross-referencing IRM 5.14.3.3).

The regulation behind this, cited in the IRM, is Treas. Reg. § 301.6159-1(b)(2): a request is not pending until it is accepted for processing.

A pending installment agreement is a proposal with a number, a filed-up account, and a financial statement when one is needed. Anything less is a conversation.

The guaranteed installment agreement

For some individuals, the IRS has no choice. IRC § 6159(c) says the IRS "shall enter into an agreement" for individual income tax if, on the date you offer the agreement:

• The tax, not counting interest, penalties, and additions, is $10,000 or less.
• In the preceding five tax years, you (and your spouse, for a joint liability) have not failed to file, failed to pay tax shown on a return, or had an installment agreement for income tax.
• The IRS determines you cannot pay in full when due.
• The agreement pays the tax in full within three years.
• You agree to comply with the tax laws while the agreement is in effect.

If that describes you and your account is levied, say the words "guaranteed installment agreement" on the first call. The IRM notes the IRS may not accept a non-processable request unless it meets the guaranteed criteria (IRM 5.14.1.3).

How to use a payment plan during a 21-day hold

1. File any missing returns first, or at least the ones the IRS requires. An unfiled return knocks you out of pending status.
2. Do the math. Use your real income and expenses. If the IRS needs a financial statement, Form 433-F or 433-A is the vehicle. Form 9465 is the IRS's Installment Agreement Request form.
3. Propose a specific payment. A number, a date, and how you will pay.
4. Ask for release of the bank levy as part of the agreement, under § 6343(a)(1)(C), and confirm the agreement does not say otherwise.
5. Get the release faxed to the bank before day 21. The release is Form 668-D (IRM 5.11.2.3.4).

If the bank already paid, ask for a return under § 6343(d)(2)(B). IRM 5.11.2.4.1 gives the example of a taxpayer who enters a full-pay agreement after a levy and whom the revenue officer verifies can meet its terms. An amount equal to the levied money may be returned. See getting levied funds returned.

The collection statute while a plan is pending

There is a cost. IRC § 6331(k)(3) applies the rule of § 6331(i)(5), which suspends the 10-year collection statute while levy is prohibited, but it carves out the period when an agreement is in effect (§ 6331(k)(2)(C)). In plain English: the clock generally stops while your request is pending, during the 30 days after a rejection or termination, and during a timely appeal, but it keeps running while an approved agreement is in force. See the collection statute and bank levies.

Defaults and terminations

Under § 6159(b)(4), the IRS may alter, modify, or terminate an agreement if you miss an installment, fail to pay another tax when due, or fail to provide a requested financial update. Under § 6159(b)(5), it generally must give you written notice at least 30 days before acting, with an explanation, unless collection is in jeopardy. Section 6159(e) requires the IRS to provide an independent administrative review of terminations if you request it, and terminated or rejected agreements can be appealed through the Collection Appeals Program (IRM 5.1.9.4).

The levy protection follows those timelines. Once an agreement is terminated and the 30-day period and any appeal end, the IRS can levy again, and a release under § 6343(a) does not prevent a later levy (§ 6343(a)(3)).

The fastest way to a second bank levy is a first payment plan you could not afford. Propose what you can actually pay.

When a payment plan is the wrong tool

• You cannot pay anything. Look at an economic hardship release and currently not collectible status.
• You can never pay it all. An offer in compromise also bars levy while pending.
• The money is not yours. A co-owner should use a wrongful levy claim.

For the nuts and bolts of setting up a plan, see the firm's guide on how to set up an IRS payment plan.