If you stopped filing and paying there will be collection activity at some future point in time on the unfiled returns. Also, the current installment agreement will be revoked and increased activity on that assessed balance may quickly result in liens and levies.
It is possible that the income from the pension, dividends and Social Security he is receiving can be levied.
It is even possible that the retirement accounts can be levied, despite what you have been told.
See http://www.irs.gov/irm/part5/irm_05-011-006.html#d0e254 for the IRS manual on the procedures to levy such accounts.
"These instructions cover money accumulated in a pension or retirement plan, as well as Individual Retirement Arrangements (IRAs). They do not deal with levying retirement income. See section IRM 126.96.36.199 above. Also see Delegation Order 5-3 (Rev-1) at IRM 188.8.131.52(23)c.
Qualified Pension, Profit Sharing, and Stock Bonus Plans under ERISA
Retirement Plans for the Self-Employed (such as SEP-IRAs and Keogh Plans) "
Even though most creditors may not be able to collect against retirement accounts, the IRS can levy on those accounts in many cases (though other assets, if available will first be accessed).
Although the current payment on the installment agreement is not even covering the interest if that agreement is continued to be paid and kept current until the expiration of the time limit to collect (generally ten years from the assessment) then any balance remaining at the time of expiration will not be collectible. These partial payment installment agreements allow the taxpayer to pay only what has been determined is proper for their financial situation each month even when the balance will not be paid in full.
It is likely to be best in the long run, both in dollars and in time and aggravation, to continue with the installment agreement until the time for collection expires. You may wish at some point to confer and engage an experienced practitioner to present all the facts to ensure that is the best course given all of his facts.
Defaulting on an agreed installment agreement (including not filing) almost always results in a nearly immediate action to collect by the IRS.
At some point in the future, if his financial situation has degraded further it may even be possible to submit financial information to asses if less than $200 is required or if he is eligible at that time to be place on "currently not collectible" status.
Not filing and paying will result in more action than continuing the installment payment agreement that may only partially pay the balance before expiration.
Please ask if you need more information or discussion.